It IS by any measure, a rout: commodity and natural resource prices plunged again last week, and with them the shares of some of the largest companies on the UK stock market.
Copper has fallen 20 per cent this year. Gold is down 15 per cent. Zinc is down 23 per cent. Shares in mining giant Glencore have tumbled to below 173p, down 42 per cent since the start of the year to a record low. The 2011 float price of 530p is a distant memory.
And the price of oil has renewed its fall, down from just over $60 a barrel earlier this summer to $49 last week. As for oil giant BP, its shares are down 22 per cent since the start of the year.
It is not only commodity and energy funds and trusts that have been hit. Because natural resources have been a critical prop to many developing country economies, emerging market specialist funds are bearing the scars. Templeton Emerging Markets is showing a 24 per cent loss over the past year and the trust is now standing at a 13 per cent discount to net assets.
Little wonder that investors who followed the diversification mantra of recent years now look at their nest eggs and wonder whether that foray into emerging markets has been an expensive mistake.
The trigger for the latest sell-off in these sectors was the move by China last week to devalue the yuan. While the fall in the Chinese currency has been modest – barely four per cent over the course of three days – the concern is that it might presage further and more significant falls, triggering protectionist currency wars.
The bigger worry, of course, is what lies behind the move by China’s central bank: a sharper than officially admitted slowdown in its domestic economy – now the world’s second largest – that could hit global growth. Lower demand from China is widely thought to have been the main cause of the slump in commodity and raw material prices. The immediate impact of yuan devaluation will be felt in neighbouring Asian economies. Chinese products will now be cheaper, blunting the competitive edge of smaller country rivals.
World stock markets tumbled last week, but losses were felt most heavily across emerging markets. Little wonder that the share prices of investment trusts investing in the sector have also fallen, with discounts to net asset value widening amid investor unease. And, of course, the repercussions are wider, given the substantial dependence of many leading FTSE 100 companies on trade, investment and exports across the Asia-Pacific region.
Dismaying though the sharp downturn in emerging market funds will be for many, I do not believe the underlying argument has much altered. First, the balance of global wealth and power continues to shift, from east to west and from north to south. It is this enormous epochal shift that continues to alter the contours of the world’s economic geography.
This shift was never going to be even or linear but one subject to changes in pace and dynamic. From an investment perspective it remains, as it has been historically, a long-term play.
Because of the inherent volatility of less developed country markets, investors need to weigh their own attitudes to risk in deciding how much of their portfolios should be invested in these funds. For a starter investor, with little by way of a substantial “First World” cushion of holdings to help absorb shocks, that initial holding may be as little as five per cent.
Rather than hitting the “sell” button on emerging market funds, might the markedly lower prices today represent a buying opportunity? The risks of plunging in now are obvious: we do not know how far and how fast the Chinese may go in devaluing their currency. We do not know the true extent of the underlying slowdown in China. What we do know is that after the huge borrowing spree of recent years and reports of half-completed buildings and abandoned development the economy is in a vulnerable state. This will be of concern to smaller Asian economies in particular.
One way to make the volatility of these markets work for investors is to feed in small regular amounts. Funds and trusts offering regular monthly savings plans are well worth considering. In this way, the investor avoids the worst of investment timing errors. And pound cost averaging works to investors’ advantage: because more shares or units are being acquired when the fund price is low – and fewer when the price is high – the average cost of shares built up in a regular savings plan is lower than the average price over the period.
Given the prospect of further turbulence ahead this autumn, I would say this advice applies to all markets at this time.