On 24 August 2015, global markets had one of their worst trading days on record as equities plunged more than 4 per cent on the back of concerns surrounding the Chinese economy. 
That day, which has since been dubbed ‘Black Monday, led many to believe that a 2008-style crash was on the horizon with various news outlets reporting on the apparent financial Armageddon sweeping through markets.
The major driver of the selling was fears relating to China. Not only was a bubble in the country’s domestic stock market deflating at a rate, but the country’s authorities moved to devalue the yuan which sparked panic that the world’s second largest economy was experiencing a ‘hard landing’ after years of increasing debt levels.
It is fair to say the immediate impact was severe, with FE data showing the likes of FTSE All Share and the S&P 500 falling some 4.5 per cent and the MSCI Emerging Markets index down more than 5 per cent.
Performance of indices during 2015’s ‘Black Monday’
Source: FE Analytics
Given the sheer scale of the selling and the pessimism surrounding risk assets at the time, many warned that this was just the start of a very painful period for investors.
“Movements of the like we have seen are reminiscent of 2008 and the intra-day moves have been rather aggressive. These seismic movements do not occur very often, yet I fear due to the extent of QE inflating the market beyond reasonable size, this is now par for the course,” Coram’s James Sullivan said.
On the other hand, FE Alpha Manager Charles Heenan said: “I find it fascinating that the explanation for all these falls is China as I think there are other drivers at work. I don’t think you get that sort of volatility without bigger stories going on, one of which is how QE has driven up most asset classes.”
As we now know, though, financial markets did recover pretty quickly after 24 August. However, FE data shows – one year on from the chaos – that many of those doomsday predictions were either too early or just plain wide of the mark.
According to FE Analytics, for example, some 95.2 per cent of the 3,522 Investment Association funds with a long enough track record have since posted a positive return despite those hefty initial market falls.
Of course, it is hard to knock those who predicted a tough time for financial markets.
The events of ‘Black Monday’ forced the US Federal Reserve to push back potential rate hikes (and only one hike has happened in the US due to fears from the central bank that its actions can spook markets), some argue the Chinese authorities have seemingly changed tact after that calamitous day to appease investors instead of sticking to their initial plan of shifting the economy to a more consumer-driven model and the likes of Bank of Japan, the ECB and the Bank of England have all further loosened policy.
As such, you could argue that the world is in a much worse state than it was this time 12 months ago, it is just actions from policymakers that have further distorted the environment.
Nevertheless, investors could have certainly witnessed some strong returns even if they bought at the very worst of times this time last year – especially in the areas that were deemed to be most at risk from the events that sparked ‘Black Monday’.
Best performing IA sectors since ‘Black Monday’
Source: FE Analytics
Indeed, those among the top five performing peer groups in the Investment Association since 23 August 2015 are the IA Asia Pacific ex Japan (34.35 per cent), IA Global Emerging Markets (33.72 per cent) and even the IA China/Greater China sector (29.38 per cent) sectors.
This theme is also borne out in the performance of individual funds.
Sitting at the top of the tables since ‘Black Monday’ are gold equity funds, which have benefitted from initially very low valuations and a rally in the gold price from its depressed levels – largely due to the concern that central banks are running out of firepower.
Indeed, the eight best performing IA portfolios over that time are focused on gold equities. The best performer has been WAY Charteris Gold & Precious Metals which has returned a stellar 170 per cent over that time, but the average IA gold equity fund has still made a significant 129.01 per cent.
Performance of funds versus indices since Black Monday
Source: FE Analytics
Once gold funds are removed from the list, though, 14 of the top 20 performers since 23 August focus on emerging markets.
These include the likes of Pictet Russian Equities, Templeton Latin America, Fidelity Asia Pacific Opportunities and NFU Global Emerging Markets as well as those tied to outlook for the developing world like BlackRock GF World Mining.
Best performing funds sine Black Monday (ex gold funds)
Source: FE Analytics
Interestingly, though, the large majority of those returns have been generated over recent months.
While the likes of the MSCI Emerging Markets index did recover from Black Monday in a matter of weeks, it treaded water until January 2016 when it nose-dived once again after various trading suspensions in Chinese markets following abrupt selling and a further collapse in the prices of various commodities.
However, since mid-January, emerging market equities have returned a whopping 45 per cent in sterling terms.
There have been various reasons behind this trend such as currency weakness following the EU referendum and the belief that the majority of macroeconomic headwinds seem to be more developed world-orientated.
That being said, Neptune’s James Dowey told FE Trustnet earlier this year that the two major drivers behind the emerging markets rally were signs of stabilisation in China and a more dovish, global facing, US Federal Reserve.
“With these two risks, in our perception, being much smaller than they were at the start of the year, we have warmed to emerging markets,” Dowey said.
The sheer strength of the recent rally, combined with historically low levels of volatility, may leave many investors looking for opportunities outside of emerging markets, though. However, it is clear that emerging markets had underperformed the likes of the US, UK and Europe for a prolonged period of time.
As such, Bruce Stout – who is overweight emerging markets in his Murray International trust – says investors should continue to focus on developing, rather than developed, world equities thanks to actions from central bankers over recent times.
“The anomalous economic and financial relationships evolving throughout the so-called developed world have recently conspired to propel bond and equity markets close to respective all-time highs,” Stout said.
“Historically without precedent and widely considered to be at opposite ends of the risk spectrum, financial theory would dictate this should not simultaneously happen for such asset classes. In practice up till now it never has.”
“Such stretched, distorted practices keep us cautious and focused on more attractive relative value deemed to exist in emerging market assets.”
