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August 24, 2015

Sussex & the City: The China effect – sell in May and go away?


in Research

Our main UK stock market index, the FTSE 100, has fallen more than 10% since its peak of 7,104 on 27th April. The worst performing stocks have been bias to commodity companies or those heavily weighted to Asia and especially China. On the other side of the fence we have witnessed stocks that have risen between 35% and 55% this year – primarily a number of UK house builders, such as Barratt Developments, Persimmon and Taylor Wimpey all of which have benefited from the uptick in the UK economy and the housing market in particular.

The dichotomy is even more pronounced lower down the scale of market capitalisation. That is because smaller and midcap stocks are typically more exposed to the UK economy than the larger more global FTSE 100 companies.

The consensus view appears to be that the slowdown in China could get worse before it gets better. Investors have certainly been concerned with the recent currency devaluation and continuing economic data that confirms the world’s second-biggest economy is shrinking at its fastest pace in more than six years.

It remains to be seen how much of a drag a further slowdown in the global economy exerts on the UK markets and if this delays a rise in interest rates, which, all other things being equal, should be positive for equities in general and sectors such as housebuilding and construction.

One thing is clear is those investors that took some money off the table in May are feeling pretty pleased with themselves, despite this summer’s correction being just the 6th in 30 years. The big question is whether, as the old adage has it, they reinvest on St Leger Day, which those racing fanatics will know is the 12th September. Whatever the UK stock market direction is from here I expect China will continue to have a significant impact.

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