The Decline in Equity markets: Why a volatile economic climate is to blame

Historically, the equity market was considered as something of a safe haven. From dividend investment in blue chip firms to the proliferation of value stocks that emerged in the wake of the great recession, equity options have always appeared in a more favourable context within more volatile markets.

The landscape has changed in recent times, however, thanks primarily to a unique combination of factors that have come to the fore across the globe. The result of this is that equity markets have fallen noticeably over the course of the last financial quarter, with Sanlam reporting that some UK and U.S indices declined by 6% by the end of December.

How Volatility has undermined the Equities market

The situation is even worse in Germany and China, where major stock indices have fallen by 9% and a staggering 15% respectively. The decline of Chinese stocks has been particularly influential in dictating the market’s malaise as a whole, with China such a prominent and driving force in the global economy. With the devaluation of the Chinese currency having also continued at pace, both equity markets and similar options have experienced huge volatility during the last three months.

While the uncertainty that surrounds the Chinese economy is highly detrimental to global growth, there are other factors that are also responsible for the current levels of volatility. The shift in oil prices offer a relevant case in point, as a pronounced decline in value during the first half of 2015 has been followed by a sudden increase of 45% from the 13-year low recorded in February of last year. This growth is expected to be temporary, however, with the current price rises largely unsustainable and likely to deliver another near-time decline.

What is next for the Equities market?

The situation is unlikely to get any better in 2016, with a tentative economic recovery encouraging some nations to consider hiking their interest rates. If countries such as the U.S and UK attempt to do this too soon, however, currencies could weaken and lead to further equity market declines. While a fundamental understanding of interest rates will help equity investors, they do little to counteract declining currency values and spiralling APR.

These factors contribute to a mixed and largely unpredictable global economy, and one that is conducive to long-term or sustainable growth. This is worrying news for investors, who will be placed at greater risk when committing their capital to both stocks and even dividend equities in the future.

Investors will need to therefore think long and hard when tailoring their portfolios in 2016, especially if they are to minimise risk and optimise their potential returns.

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