Market volatility has some way to run yet

Nervy times for investors. The Irish stockmarket has now fallen 10 per cent from its December high, as measured by the ISEQ index, knocking more than €12 billion off the value of the market.

What looked like it might be a little start-of-the-year nervousness has now turned into a bit of a market rout, with a brief recovery on Tuesday wiped away on Wednesday by big falls across the board.

While there are some sectoral themes internationally – not surprisingly oil and commodity shares have been hammered – the overall trend is of cash flowing out of anywhere seen as risky, or relying on a continuation of decent economic growth.

As world political and business leaders meet in Davos, the message from the markets is that 2016 could be messy. Part of it is that there are a lot of different factors at play, albeit that they are interlinked.

Fears of growth in China have led to falls in its markets and currency, knocking on to other emerging markets in the region. Concerns that lower Chinese growth will lead to falling demand for oil and other commodities had seen these prices lower, intensifying the pressure on many commodity exporters, mostly so-called emerging markets like Russia and Brazil.

In turn this has all intensified concern about slow growth and “stagnation” in the developed economies.

This has led to big fall in equity prices, due to fears that slower growth will hit corporate profits. Any disappointment in corporate results – as with IBM and Intel recently - are harshly punisyhed.

Bear territory

Relatively speaking the the Irish market has not been hard as hard as others. Many markets, including London after yesterday, are now officially in “ bear” territory, having lost 20 per cent from their highs. Oil prices have been falling like a stone, meanwhile, and safe havens like US and German bonds are thriving. Our own bond market has held in, but, interestingly, Portuguese bonds took a heavy hit yesterday, with the yield on that country’s 10 year bonds rising to 2.92 per cent, nearly two percentage points above similar dated Irish debt.

It is a nervy time for investors, many of whom dipped their toes into equities or funds linked to equities because of the rock-bottom return available on bank deposits. A few years ago , in the heat of the crisis, the saying was that for investors it was a case of getting a return of their money, rather than a return on their money. Now many will be worried that we are heading back into similar terriotry.

For example, many Irish investors will have received good dividend returns over a number of years from big oil companies such as Shell and BP, but will be wondering what the outlook is now. Things look even worse for big mining stocks such as Glencore. Meanwhile pension funds will have taken a heavy hit and the coincidence of falling returns and rock bottom interest rates will be a nightmare for defined benefit pension schemes.

What lies behind this is, to an extent, fears about how the developed world will return to anything like normality after the financial crisis and with huge central bank stimulus in place. Add in fears about China and an oil glut to the picture and many analysts fear that market volatility has a way to run yet.