No immunity from uncertainty

Over the past few months, emerging markets, China in particular, have been seen as likely contenders to lead a global economic recovery and drive the return to growth. Indeed our own Investment ViewPoint: Analysis “Emerging markets – ready for recovery?” discussed this topic.

China has certainly set the pace for recovery with the Shanghai Composite index gaining over 80% from the start of the year through to the beginning of August. However, during August, Chinese equities have suffered a sharp sell-off and the index dropped 20% between 4th and 19th of the month. In fact August has been the most turbulent period for the index in months, recording its biggest one-day fall in the past 9 months and its largest daily gain since March, all in the space of 7 days. So, despite being a leading light towards economic recovery, China has proved no more resistant to market wobbles than many other equity markets.

The initial aspect of interest here is the triggers behind this volatility. Chinese stocks have slumped this month, with investor confidence eroded on the back of a decrease in new bank loans in July and concern that the government may seek to dampen property speculation. Further fears that monetary policy may be tightened contributed to the fall, despite assurances from the People’s Bank of China that it would retain a ‘loose’ monetary policy. Views are mixed on whether this recent activity represents the onset of a Chinese bear market or is more of a natural correction in the ongoing growth curve.

Of even more interest, is the attitude of the rest of the world. In some camps, China is now being viewed as a significant driver of global economic health, with a closer correlation expected between Chinese and developed market performances. As such, some analysts are suggesting that in the future, they will increasingly look to China as a barometer when forecasting broader market outlooks. However the alternative view is that many of the fundamentals of the Chinese economy do not actually lend themselves to being drivers of global market performance and that any correlation is going to be largely based on sentiment rather than hard economics.

Regardless of this debate, the key lesson of the past few weeks is that China, as with all emerging markets, is susceptible to volatility and analysts and investors alike need to factor this into their thinking. Investors in particular should consider volatility when deciding on an emerging markets allocation within a globally diversified portfolio - smaller percentage allocations may be more prudent for some.

If emerging markets, or China in particular, have investment appeal, find out about the various ways you can get exposure to them through our Investment ViewPoint: Analysis “Emerging markets – ready for recovery?. Given recent volatility a structured product with a focus on China that offers an element of capital repayment, such as Barclays China and Agriculture Investment Note may be of particular interest. However bear in mind that structured products are not suitable for everyone; when investing in these products you should be aware that you may receive back less than you invested. If you are unsure about the suitability of structured products for you, you should seek independent advice.

And remember that you can keep track of all the market news and movements through Barclays Stockbrokers Research Centre.

Eurozone recovery or a flash in the pan?

Following on from our Investment ViewPoint from the 20 July ‘The shape of things to come?' recovery seems to have come earlier than expected at least for some but is it a flash in the pan or the beginnings of a recovery for the eurozone?

Thursday’s announcement from France and Germany that growth was back in positive territory with GDP up 0.3% following four quarters of negative growth surprised economists who had been predicting contractions. Stronger exports and consumer spending, as well as government stimulus packages seem to have been the main contributing factors to this.

This positive news from the two biggest economies in the eurozone, who between them account for approximately 48% of the areas GDP, helped contribute to lower negative growth - GDP in the 16 country bloc was down only 0.1% in the last quarter. Although not increasing as yet it was certainly an improvement on the 2.5% decrease in Q1.

In contrast the UK saw GDP fall back 0.8% with The Bank of England’s Inflation Report striking a mixed message. On the one hand, the Bank made clear that market expectations for the path of interest rates would cause the inflation target to be undershot, hinting rates will need to stay low for longer than is currently priced in. The Bank also stressed that it was disappointed by the impact of quantitative easing and lending growth so far. On the other hand, the Bank raised its growth forecast for 2010, albeit starting from an even weaker 2009 growth rate than it forecast a quarter ago.

The fact that Germany and France can now say they are technically out of recession, while the UK is still in it, is certainly positive news for German Chancellor Angela Merkel who faces both an upcoming election and no doubt continued opposition at next months G20. However, some commentators think it might still be a little early to relax as a return to negative growth in coming quarters cannot be ruled out. So what shape do you now think the recovery will take?

Read our Investment ViewPoint from the 20 July ‘The shape of things to come?' for more on the different scenarios for recovery shapes and what they mean, including our recent Smart Investor email feature ‘Market Recovery’.

What’s your view?

If you are interesting in gaining exposure to the eurozone you could consider exchange traded funds (‘ETFs’) which aim to track European benchmarks and offer weightings in French and German stocks. Take for example the iShares DJ Euro STOXX 50 (EUE) or iShares FTSEurofirst 80 (IEUR). See our iShares factsheets page for a full list of available iShares which trade on the London Stock Exchange. ETFs are traded like shares and may not be for everyone. They closely track the performance of an index and as such their value can go down as well as up and you may get back less than you invested.

Remember that you can stay close to market activity throughout the day by visiting our Research Centre and tracking the movements of the index or equities of your choice.