Stocks carnage: what it means for you

Stocks carnage: what it means for you

It's official, the stock market's just had its worst ever start to a year. But apart from causing the odd heart palpation on trading floors, the carnage doesn't necessarily spell doom for the average UK citizen. 

Who are the winners?

Shares, in part, are being driven lower by a sharp downturn in oil prices, hurting the profits of some of Britain's biggest and best-known companies, such as BP and Shell.

But the oil-price rout is also slashing costs at the petrol pump. That's helping UK families save and perhaps even spend those savings on other goods and services – supporting the overall economy.

"Low oil prices are a good thing," Michael Hewson, chief market analyst at CMC Markets in London, said via telephone. "They make up for the weak wage growth that we're seeing in the UK at the moment."

Rock-bottom petrol prices help businesses, too, by bringing down the cost of carting everything from heavy machinery to fruit and vegetables across the country. Shares in International Consolidated Airlines, the owner of British Airways, are actually slightly higher today than they were a year ago.

And things could get better. Some analysts predict oil will fall as low as $10 per barrel, which could mean petrol as cheap as 86p per liter – below the cost of a bottle of water.

Who are the losers?

The most obvious losers from shares crashing are investors and the financial services firms that do their bidding. More broadly, anyone with a pension is hurting because a large proportion of pension fund investments comprise shares. 

Employees of energy companies are also feeling the pinch. So-called Big Oil spent billions of dollars investing in massive projects when oil was fetching more than $100 a barrel. Now, those companies are laying off thousands of workers as those projects struggle to break even.

"Many jobs in the oil industry are highly paid, so there's concerns oil-company layoffs could have significant trickle down effects into broader consumer sentiment and the broader economy," said CMC's Mr. Hewson.

To be sure, share-market corrections like the one witnessed now can be healthy because they prevent the formation of asset-price bubbles. 

Britain's FTSE – although entering a so-called 'bear market', where stock prices are 20 percent below their most recent peak – is still some 60 percent above its low-point in the aftermath of the global financial crisis.  

Of course, though, a prolonged downturn would never be a good thing because it would indicate the global economy is weakening.

Could there be another financial crisis?

China is at the root of the current problem in global markets. A dramatic slowdown in its economy is partly behind the fall in oil prices because the country is the world's biggest energy consumer.

Among traders, the jury's still out on whether China's government can successfully navigate a transition away from being an economy simply driven by manufacturing, to one that's driven by domestic consumption and services. 

“China has a major adjustment problem,” billionaire investor George Soros told an economic forum in Sri Lanka earlier this month. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge, which reminds me of the crisis we had in 2008.”

Not everyone, however, is panicking. China's economy, while slowing, is still growing at 6.9 percent at a time when the U.S. and U.K. economies are recovering.

"The banks are in better shape than in 2008 and 2009, so I'm not concerned at this point about another global financial crisis, but that's not to say it can't happen," said CMC's Mr. Hewson. 

"China has still got reserves in place to deal with the economic transition they want to bring about, although that doesn't mean there won't be bumps."

Happy Investing

Source:Moneycontrol.com