According to research from Société Générale, the two most negative contributors to the MSCI World in August were financials and healthcare – global banks fell 9.1% during the month, pharma lost 7.5% and the frothy biotechnology sector dropped by more than 10%.
“We highlight these particular sectors as many investors seem to believe the current market problems are solely related to the issues in China,” says Soc Gen’s Andrew Lapthorne, head of quantitative equity research.
“Clearly the market, as demonstrated today, is sensitive to the impact of a slowing China and all that entails, but the starting point for the sell-off was also an equity market in extreme valuation territory in which M&A and IPOs were booming.”
He stresses that understanding this and the knock-on effects will be key to determining how and when investors might start venturing back into the market, looking for potential bargains.
For Richard Philbin, chief investment officer at Harwood Multi-Manager, it is understandable why these two sectors in particular might be the most adversely impacted.
"From 23-28 August, the Dow Jones Industrial Average moved up and down by an incredible 5,612 points"
He explains: “Financials are always a geared play into the markets – if investors think things are going well then financials should by and large benefit from that. Then if everything slows down, with the oil price having dropped as much as it had, many banks are massively geared to oil companies possibly defaulting.”
With regards to biotech and healthcare, he adds: “There has been a lot of activity in that sector for a good number of years now and certainly hedge funds are very actively playing in that and the M&A story. The fear is that we are getting closer to interest rates rising and that will start to choke these companies off."