“The worst start to the year on record” is the universal summation, with markets in Europe, Japan and the UK now down 20 per cent since the spring of last year – a formal bear market – apparently – until a rally on Friday yanked prices off the bottom.
And direction of travel? It’s hard to tell now that most of us have our heads between our knees, but downwards is the definite impression. Yet after the tail-end rally, the FTSE100 ended 1.65 per cent up on the week.
In Japan the Nikkei 225 tumbled 6.6 per cent since last Monday but recouped almost all of this on Friday to end with a fall of just 1.1 per cent.
What is going on? Worrying growth figures from China and a further fall in the oil price are to blame. But the China story is not new – the slowdown has been evident for well over a year. And while Scotland’s North Sea oil industry has suffered severe pain, since when did falling oil become such terrible news? For energy-consuming businesses and cash-strapped households, cheaper energy and fuel bills are a plus, not a minus.
But it is not just energy stocks and China-related companies that have taken a battering. A popular cry in times like these is “stick with quality companies”.
And they don’t come with much more quality that investment trust giant Scottish Mortgage. It has been the toast of the market for the past three years and lauded for its forward-looking portfolio comprising the world’s fast-growing information technology, healthcare and biotech companies. Shares in Scottish Mortgage have almost doubled in five years. But often the highest fliers have the hardest falls – and so it has proved for this top quartile trust.
Last week the shares fell to their first discount in nearly two years as a result of the stock market turmoil, with the fall since 1 January extending to 15 per cent at one point – the biggest decline of any global growth trust, according to Numis Securities data.
Scan the top holdings in the Scottish Mortgage portfolio and there is not a commodity or energy-related share among them. Yet the sell-off has sent the share price tumbling two per cent below the trust’s net asset value, the first time it has been at a discount since June 2014.
Then came the surge on Friday as investors considered the fall overdone. The response saw the shares rally 5.5 per cent to 248.5p. But that still leaves them nearly 10 per cent down since the turn of the year. The topsy-turvy turbulence is not simply about China woes or oil giant dividends at risk. It reflects market worries that shares in many of the world’s most successful companies had risen too far and had come to look over-priced in a world where growth prospects have become considerably less certain than was the case a year ago.
The trust strategy of buying into high growth internet and biotechnology businesses left it vulnerable to the spasm of risk aversion that has seized markets in recent weeks. The trust was all the more vulnerable since the dividend on the shares was negligible and thus lacked a yield ‘prop’ that would have helped to cushion the fall.
Those who thought the sainted Scottish Mortgage was above such petty concerns as risk reappraisal have thus learnt a sharp lesson about the vulnerability of super-growth investment funds to periods of abnormal turbulence.
But volatility is a two-edged sword for the opportunist. They see the re-appearance of the discount as a short term phenomenon and as a buying opportunity for the long term investor.
Scottish Mortgage is not alone in feeling the pain. As the Citywire website pointed out, shares in the £323 million Lowland Investment Company have been subjected to a sharp sell-off since the turn of the year.
Fund manager James Henderson has tended to opt for a contrarian approach, going for out-of-favour areas of the market – but this policy has cost him of late.
This has led him to add to holdings in battered oil giant Shell and the equally embattled mining colossus Glencore. As they used to say in Yes, Minister: “Brave, Prime Minister, brave”. Far from the commodities sell-off having steadied and reversed, it has resumed this year with, if anything, greater venom. Hit by the continuing fall in the oil price, shares in Lowland tanked by 18 per cent at one point before Friday’s rally saw a 6.2 per cent bounce.
Given volatility like this, investors can be excused a temptation to sell. My advice on this Big Dipper? Make sure your holdings are diversified, build up cash, feed in money in small regular amounts – and grip the railings hard.