Global markets are getting set for a volatile week as investors digest news from Greece and China over the weekend. In Greece, voters decided not to yield to further austerity measures demanded by creditors. In China, authorities announced a series of new measures that they hope can stabilise the country’s equity markets.
Neither of the weekend’s two major news events was entirely unexpected, but together they will certainly be adding to volatility across markets in the coming days.
In Greece, the impact of the decision not to accept the latest austerity measures demanded by the country’s creditors is still being considered. Until all concerned parties begin to meet again in the coming days it is not worth predicting what any final outcome may be. From the Greek perspective, the decision gives them more negotiating power as they seek to restructure their debts. The country’s creditors may see things differently however, and may insist on the current measures being implemented before contemplating any debt relief. Only the coming days will tell.
In China, authorities have increased their efforts to stabilise equity markets after a three week sell off which has seen shares fall 30%. Initial moves taken over the past two weeks failed to halt the fall, but the measures announced at the weekend show the determination to stabilise. These include regulators providing margin financing to brokers, 28 IPOs being suspended, domestic asset managers agreeing to buy units in their funds and hold them for 12 months, and increased QFII quotas.
Uncertainty usually leads to volatility in markets and we can expect the coming days to be a bit of a rollercoaster ride. It is worth keeping in mind some basic investing tenets as the days unfold:
- Volatility is a normal part of long-term investing: From time to time, there will inevitably be volatility in stock markets. When we are prepared at the outset for episodes of volatility we are less likely to be surprised when they happen, and more likely to react rationally. By having the right mind-set, we can take a dispassionate view and remain focused on long-term goals.
- Corrections can create opportunities: Corrections are a normal part of bull markets and can be a good time to invest as valuations become more attractive, giving investors the potential to generate above-average returns when the market rebounds. Some of the worst historical short-term stock market losses were followed by rebounds and new highs (Chart 1).
- Avoid stopping and starting investments: Investors who remain invested benefit from a long-term upward market trend. When investors try to time the market and stop-and-start their investments, they run the risk of denting future returns by missing the best recovery days in the market and the most attractive buying opportunities. Missing out on just five of the best performance days in the market can have a significant impact on longer term returns (Chart 2 and Table 2).
- Active investment can be a successful strategy: When volatility sends markets sideways, successful stock-picking can be rewarding compared with indifferent returns from passively following the index. Volatility can introduce opportunities for bottom-up stock-pickers. At Fidelity, we believe strongly in active management and we have a large global research team to support this. Because we analyse companies from the bottom up, we are well positioned to make attractive investments when other investors might be shying away from investing, especially during bouts of market volatility.
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