Recent turbulence across UK stock markets will have unnerved many investors, particularly new ones.

Not since 2015, sparked by a massive sell-off in Chinese shares, has the stock market terrain shifted so violently.

But macroeconomic fundamentals remain largely unchanged and company profits remain on the front foot.

As a measure of calm returns we consider what lessons can be learned.

1) TRYING TO TIME MARKETS IS FUTILE

Investing is not about predicting the short-term future, it’s about creating wealth through patient progress and the harvesting of dividends over time.

2) CENTRAL BANK POLICY CHANGES CAN BE UNSETTLING

After years of cheap credit, inflation is now becoming the chief concern for central banks. That implies higher interest rates which could weigh on share prices and the market mood, but this is part of the process of returning to normal monetary policy.

3) TRADING ALGORITHMS MATTER

The origins of the sell-off were rooted in fundamentals (inflation, interest rates etc) but the stock market swings were amplified by automated trading systems and the unwinding of crowded volatility-related trades.

4) WATCH FOR CRACKS IN OPERATING MODELS

Huge debts (Carillion), slashed dividends (Centrica (CNA), Provident Financial (PFG), TalkTalk (TALK)) and strained balance sheets are all indicators of business models in distress. These are some of the pressure points worth watching.

5) DON’T FORGET THE FUNDAMENTALS

The underlying backcloth remains largely positive with high employment, the emergence of the first real wage growth in years and inflation nothing like the double-digit levels of the 1970s and 1980s.

Corporate profits are also robust, as is dividend growth. There are plenty of positives to counter balance any concerns.


Issue Date: 15 Feb 2018