China stock market: Keep your nerve even if markets dive in the wake of volatilty

Fears over China have played havoc with the market, but it has careered between lows and highs. Rob Griffin asks what investors should make of it

Bad moon on the rise: some experts fear Chinese-fuelled volatility will continue to shape the fortunes of the markets, but others are more optimistic (Getty Images)

It is certainly a challenging time for UK investors. Just a few weeks after billions of pounds were wiped off the value of shares on “Black Monday”, caused by panic selling in markets across Asia, they are enduring further waves of turbulence.

Widespread concern over global growth – caused particularly by the outlook for China and the US Federal Reserve keeping interest rates on hold – caused the FTSE 100 index of leading companies to dip below the psychologically important 6,000-point mark again on Tuesday.

The tumble was down to a sell-off in commodity-related companies, which account for a significant proportion of the index, as well as oil price declines and the fallout from the Volkswagen emissions scandal.

When you consider that it's only five months since the FTSE soared to a record high of more than 7,000 points, it's understandable that investors are asking what is happening to markets and whether it's still safe to put their money there.

David Madden, an analyst at the trading firm IG, believes investors need to prepare for further volatility over the next few weeks, with the extraordinary market movements over the past two months being a blueprint for what to expect.

“It feels like the calm before the next move down,” he said. “We've had major sell-offs followed by a pull-back, and then it trades sideways for a number of weeks before there is some other damaging news.”

Mr Madden argued that it would take “amazing news” to drive the market back up to pre Black Monday levels, especially as traders don't have the confidence to buy into shares due to fears over the prospects for China.

“It's ultimately the uncertainty out of China that is at the root of this,” he said. “ Not only is it behind the major move to the downside, traders are also unclear what the impact will be of China's currency devaluation as that has yet to trickle down to markets.

”In fact, we probably won't know what this will be until we see economic indicators at the end of 2015.“

He pointed out that any sign of China weakening is likely to fuel speculation about some sort of financial stimulus. Until a clearer picture emerges, he suggested, volatility will continue to stalk international indices.

However, Richard Hunter, head of equities at the broker Hargreaves Lansdown, pointed out that the FTSE 100 is still full of world-class companies and suggested a ”bottom-up“ approach to investing that focuses on the fundamentals of individual stocks.

”The difficulty has been picking out a positive catalyst that might jolt the markets into action – but the obvious one on the horizon is companies reporting their third-quarter earnings figures in early October,“ he said. ”The first two quarters were better than expected, so we'll have to wait and see if companies have continued to make progress.“

Of course, the FTSE 100 running into short-term problems is not all bad news. It can provide buying opportunities for investors, according to Helal Miah, investment research analyst at broker The Share Centre. Much of the volatility surrounds companies in commodities and oil and gas, So it makes sense, he said, to consider more defensive names that have been dragged down through no fault of their own.

”GlaxoSmithKline is a company where I think there is good value. The shares have returned to 2011 prices and I consider the drug giant as one worth buying and holding on to for the medium to long term as it yields a nice 6 per cent dividend for investors.“

Mr Miah suggested that more adventurous investors might consider the oil and mining sectors, although he advised them to concentrate on the mega-caps as their balance sheets are better equipped to ride out the commodities slump.

”As an alternative to individual shares, investor could also look to time their entry into the markets by buying managed and/or tracker funds,“ he added.

Stock market turmoil: How should you react?

Patrick Connolly, a certified financial planner with Chase de Vere, believes it's important to acknowledge that sentiment can change quickly. If people are putting their money away for the longer term, he argued, they need to accept volatility is part and parcel of investing.

”The reality is that nobody knows where stock markets will go,“ said Mr Connolly. ”For most people it still makes sense to invest in shares for their potential to give strong returns, but to offset risks by holding other asset classes such as cash, fixed interest and property.“

He suggested investors scared by the volatility reassess their portfolios.

”If you have a sensible, balanced and diversified investment portfolio, you really shouldn't need to worry during times when stock markets are falling,“ Mr Connolly added.