Why the circa 1000pt drop?

As the world’s 2nd largest economy, China’s economic strength not only reflects the economic confidence of the Asia-Pacific region in general, but that of the whole world as well. It’s been the biggest market in the world for commodities for some years, fuelling a huge commodities boom that now appears to be subsiding along with the Chinese economy itself. Not only has this cultivated fears of a slowdown in demand for basic materials which has put pressure on the mining sector that contributes so heavily to the UK 100 , it’s cast doubts as to how far we can actually trust the data coming out of China as attention remains fixed on its ‘exotic’ stock market rather than its economy.

The fact is that some very big names in business (including the boss of mining behemoth BHP Billiton (BLT)) have recently come out flying the flag for China. This all points to an emphasis on fear rather than what’s actually going on in China.

“… we have continued to experience strong growth for our business in China through July and August”
Apple CEO Tim Cook "We're still seeing strong sales of iron ore, coal, and copper moving into China”
BHP Billiton CEO Andrew Mackenzie

“I remain an unabashed bull on China”

WPP CEO Sir Martin Sorrell

In the US, meanwhile, the rate hike soap opera continues amid fragile inflation growth caused largely by very low oil prices. There’s a certain amount of boredom with this, but it remains an important driver due to its impact on the strength of the Dollar and ergo all Dollar sensitive markets – think commodities and international debt denominated in the US currency.

Well, the Fed remains divided and it appears we’ll be spared interest rate rises in 2015 because of recent volatility, which is going to be good for equities.

The fact that the recent sell-off has exposed some very reasonably valued stocks given the outlook for the remainder of the year should be getting investors returning from holiday (those who ‘sold in May’) excited!

Market Observations

UK 100 Index

UK 100 Daily Chart

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The UK 100 is now trading at levels not seen since 2013, in an area of support between 6000 and 6200. Of interest on a technical level is the daily RSI indicator, which hasn’t spent much time in oversold or overbought territory for the past 24 months. When it has been oversold, there’s been an average subsequent up move of around 400 points. Likewise, when the daily RSI has gone overbought significant corrections have often followed, making for plenty of opportunity to profit from riding the swings in the index itself.

It’s thought that considerable exposure to China has stung the UK 100 and its constituent stocks, but recent comments from big business chiefs – think the likes of BHP Billiton’s Andrew Mackenzie, Apple’s Tim Cook and WPP’s Sir Martin Sorrell – would indicate otherwise. Could it be that it’s not Chinese economic slowdown per say that caused the late August sell-off, but merely widespread fear of a Chinese economic slowdown?

Fact: If one believes the data is at least somewhere approaching accurate, then China is still growing faster than the UK, Europe and the US.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
W. Buffett

Equities

Below are the ten best and worst performing stocks since the UK 100 made its all-time highs back in April.

Risers

Fallers

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Source: Bloomberg (3 Sept 2015)

The under performers are dominated by the high beta mining stocks that have been so hurt by perceived economic turmoil in China. Note, however, the outperforming house builders and retailers benefitting from low inflation and low interest rates here in the UK.

September Surge?

As mentioned above, Morgan Stanley recently put out a ‘full house’ buy alert on international stock markets, effectively calling the bottom of 2015’s late summer equity slump. The last time it issued such a bullish signal, back in 2009 following a massive financial crash (so massive it was subsequently termed THE financial crash!), the UK 100 promptly commenced an uptrend that’s still valid today. Furthermore, Morgan Stanley’s bold call has got people recalling the months leading up to the Financial crisis when, in June 2007, it issued a ‘full house’ sell signal. Morgan Stanley has successfully called both the top and bottom of the market over the past 8 years.

Whether or not it’s called it right this time, you can be assured that investors and traders alike will react to this.

As traders and those who ‘sold in May’ return to the markets in September to find heavily discounted stocks and a market bottom called by one of the world’s leading investment banks, which way do you see the markets going? Whatever your position, one place not to be is on the side-lines.

No successful investor ever bought in at the top of the market.

It’s times like this that present the best opportunities to pick up the right stocks at great prices. Don’t miss out!

Read on for five stocks to watch in September…

Aberdeen Asset Management (ADN); Asset Managers

Price change since 14 April UK Index highs:  -37%

ADN daily chart

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Will the price bounce up towards 400p or will it fall beneath lows of 290p?

Observations: ADN is a leading UK emerging markets investment fund, which is why this particular stock is currently touching on 3-year lows. To trade Aberdeen Asset Management would be to trade the Chinese economic outlook with one eye firmly on the US Fed. A US rate hike looking to be pushed back until at least the end of the year and a certain amount of nerve-calming regarding the world’s #2 economy from people who really should know their stuff is a start, while a look at the competition in Man Group, struggling with its flagship automated trading strategy gives ADN considerable potential as a vehicle on which to ride a possible emerging markets bounce-back.

Bloomberg broker ratings: 20% Buy, 60% Hold, 15% Sell; Consensus Target: 416p, +35% (26 Aug ’15)

Most Bullish: Peel Hunt, buy, TP 490p, +60% (5 Aug ’15)

Most Bearish: Morgan Stanley, underweight, TP 345p, +12% (23 Jul ’15)

Glencore (GLEN); Basic Materials / Mining

Price change since 14 April UK Index highs:  -57%

GLEN daily chart

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Will the price bounce up towards 320p or will it fall beneath lows of 138p?

Observations: Glencore is perhaps the best placed of all the UK Index miners to a) bounce back quickly if and when commodities recover their poise or b) innovate its way out of the situation. The business includes not only mining itself, but commodities trading as well which means it can leverage currency fluctuations to make decent profits from buying commodities in one part of the world and selling them in another. The currency swings we’ve recently seen in Asia-Pacific are creating the ideal conditions for Glencore to outperform its sector at large amid continuing woes for commodities.

Bloomberg broker ratings: 40% Buy, 43% Hold, 17% Sell; Consensus Target: 244p, +75% (26 Aug ’15)

Most Bullish: Bernstein, outperform, TP 447p, +221% (25 Aug ’15)

Most Bearish: Investec, Sell, TP 132p, -5% (14 Aug ’15)

Tesco (TSCO); General Retailers

Price change since 14 April UK Index highs:  -24%

TSCO daily chart

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Will the price bounce up towards 310p or will it fall beneath support at 155p?

Observations: Tesco shares remain under pressure as we move towards the end of Q3 on worries about the pace of much needed asset sell-offs, but Investors will be reassured by news that its South Korean business, Home Plus, may finally be offloaded to private equity firm MBK Partners. Furthermore, ‘drastic’ Dave Lewis has done well on decisive cost-cutting measures. Store closures, scrapping of new developments, the closing of the company’s Cheshunt headquarters, the ending of the defined pension scheme and axing of dividend payments are all welcome signs of progress, and a new advertising campaign due to start in the autumn may be set to decisively kick start a recovery in the UK’s best known supermarket.

Bloomberg broker ratings: 37% Buy, 41% Hold, 22% Sell; Consensus Target: 228p, +21% (1 Sept ’15)

Most Bullish: HSBC, buy, TP 295p, +57% (23 June ’15)

Most Bearish: Day by Day, Sell, TP 163p, -13% (19 Aug ’15)

Johnson Matthey; Chemicals

Price change since 14 April UK Index highs: -24%

JMAT daily chart

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Will the price bounce back up towards 3600p or will it fall beneath support at 2500p?

Observations: Shares in JMAT are currently at levels not seen since June 2013. Not a stock that tends to make big headlines, this could be one that’s off the radar of many an investor – but we can’t see any reason why that should be. JMAT is really best known for being a manufacturer of catalytic converters (using currently cheap precious metals to make parts for a ‘too big to fail’ automotive industry…) but it also has arms that deal with downstream oil & gas (the still-profitable part of that sector). So we’re left, as with so many other stocks, with sentiment towards China as the weight on JMAT’s shoulders. China’s economy might be slowing, but it’s still growing.

Bloomberg broker ratings: 59% Buy, 41% Hold, 0% Sell; Consensus Target: 3283p, +23% (1 Sept ’15)

Most Bullish: HSBC, buy, TP 3800p, +43% (10 Jul ‘15)

Most Bearish: Liberum, hold, TP 163p, +9% (22 Jul ‘15)

Lloyds Banking Group (LLOY); Banks

Price change since 14 April UK Index highs:  -4%

LLOY daily chart

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Will the price bounce up towards 90p or will it fall towards lows of 70p?

Observations: Lloyds has been a favourite among swing traders this year, offering countless entry and exit points as well as the odd bit of high volatility – the stock is only down 4% since April, but look where it went in between. Perhaps the least hated of the UK’s banks (It’s had a fair amount of PPI related wrist slapping but, with no investment banking arm to speak of, it’s managed to steer clear of allegations of interest rate rigging). The share price is no doubt a huge attractor: 75p! With brokers tipping the stock for 100p and above, and following a massive August equity market sell-off, the upside potential on LLOY now sits at  >25%.

Bloomberg broker ratings: 57% Buy, 29% Hold, 14% Sell; Consensus Target: 91p, +21% (26 Aug ’15)

Most Bullish: JPMorgan, overweight, TP 105p, +39% (3 Aug ’15)

Most Bearish: Berenberg, Sell, TP 55p, -27% (18 May ’15)