Investors Should Prepare for a Rocky Autumn—Despite the Q3’s Final Flourish

By Nigel Green, founder and CEO of deVere Group 

The third quarter of 2015 was the worst three months on global financial markets in four years. 

Whichever way you look at it, the major markets took a battering between July and September. The FTSE 100 was down 7.4 percent. The Dow was down 7.9 percent. The DAX was down 11.7 percent. The Nikkei was down 14.5 percent. And the Shanghai Composite was down a staggering 24.7 percent. 

Yet despite these sombre numbers, markets rallied towards the end. Indeed, most global indices ended with a 2-percent gain. 

It is this final flourish that should perhaps set alarm bells ringing for investors. This is because despite the strong potential headwinds for quarter four, the markets are (at the time of writing at least) seemingly nonchalant to the issues that would normally send them into a tailspin. 

First on the list of major concerns is, as should be expected, China and its economic slowdown. It is not entirely clear by how much the world’s second largest economy is slowing—this is partly because the Chinese authorities have not issued revised figures, perhaps not to cause alarm or to save face—but there are indisputable signs that it is. What we do know, however, is that China’s manufacturing output, as measured by the official Purchasing Managers’ Index, was 49.8 points in September, compared with a reading of 49.7 the month before. Manufacturing is a key driver of the Chinese economy. 

Previously, at the end of August, when China’s benchmark index plummeted by 8.5 percent in a trading session, markets in Australia, Japan and South Korea then echoed events in Shanghai. That prompted similar reactions in Europe and the US. The sell-offs were considerable on what has since become known as “Black Monday”—and the volatility continued into Tuesday’s and Wednesday’s trading. 

Black Monday was only the latest in a series of stock-market crashes in Shanghai, which have all been stemmed—at least temporarily each time—by the Chinese authorities’ support measures. 

Second, we’re entering US earnings season. This is expected to be rocky with profits predicted to be down by as much as 3 percent for many of America’s largest companies. 

Third, is the question mark hanging over when the US Federal Reserve will raise interest rates. For example, will they raise them for the first time in nine years on October 28 or December 16? And how will this affect the US and global economies? 

Fourth, is the poor economic data coming out of important emerging markets. The main driver of the problem here is that they are primarily resource-based economies, and there has been that considerable and well-publicised drop in commodity prices. 

And fifth, are the increasing tensions between Russia and the West due to Russia’s airstrikes in Syria. These strikes are, according to some Western analysts and governments, not only against Islamic State but also against the West’s allies. With President Putin not known for doing things by halves, this is a situation that looks set to intensify over the next three months. 

Yet as we enter the fourth quarter with all these major geopolitical events and the poor economic data coming into sharp focus and usually being reasons for major concern to global financial markets, they appear to be almost turning a blind eye. 

This irrational verdict from the markets going into the final three months of the year to my mind suggests that the final flourish rally was a temporary phenomenon and that much more volatility should be expected through the autumn/winter of 2015-16. 

With a rocky quarter likely, I would urge all investors to ensure perhaps now more than ever that their investment portfolios are well-diversified to help manage risk and avoid any potential downside. This, of course, means a real and suitable balance across asset classes, geographical regions and industrial sectors. Failure to diversify a portfolio is widely regarded as one of the most common investment pitfalls—and all experts would agree that diversification in these times of rising market volatility is even more essential. 

Those who have a well-diversified portfolio will also be best placed to take advantage of the opportunities—perhaps especially in areas such as Japan, China and the Eurozone—that will surely be presented in these times of likely increased turbulence.

Volatility always brings upside with it, too, and investors should seek a good fund manager to help them take advantage of and benefit from the right stocks at the right time. 

After all, the history of the stock market demonstrates that optimism typically pays handsomely.