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Is China Really That Much Of An Issue For The FTSE 100?

As the war of worlds between Chinese officials and US politicians continues, the UK is squeezed in the middle — so the value of our holdings could swiftly plummet.

Well, if you are invested in equities or in the FTSE 100 for the long term, there are ways to get around volatility. Here’ s how it works.

Lesson one

Star investor Neil Woodford recently said that you should not tie your savings to global indexes. 

When markets fall, headlines focus on the impact on well-known equity indices. But this doesn’t tell the full story. Truly actively managed funds look nothing like the index – this means their performance can, and should, be very different,” he argued.

This means that there are ways to outperform the market even when professional investors are panicking. How do you do that? 

You must look further down the value chain, choosing the stocks of smaller companies that boats solid financials and enticing growth prospects. Consider the recent performances of Safestyle (+43% year to date), McBride (+89% year to date) and RPC Group (+30% year to date), for instance.

Take Betfair, too, a betting firm that is merging with Paddy Power.

Pockets of value

Lesson two: do not abide by short-term value forming your judgement upon a fully fledged approach based solely either on fundamentals or on macroeconomic trends. Be smart: combine the two. 

Yet if you do not understand some of basic financials and metrics included in the financial statements of most companies, you should not invest a penny in the stock markets. 

Certain companies included in the FTSE 100, such as British American Tobacco, are working hard to fend off the threat posed by sluggish growth rates in the global economy. Others, such as BP, have reacted swiftly to tough trading conditions. Even Glencore has realised that is no longer business as usual. Other miners, including Rio Tinto, may take heed. 

This is not to say that you should buy the shares of all these companies, but I think it’d be safe to allocate part of your savings to BP at 340p a share, while betting that British American Tobacco will quickly deleverage its balance sheet makes a lot of sense to me. 

Lady Luck? Nah…

In short, volatility presents a truly unique opportunity to buy shares that are grossly undervalued — but you must do your homework, learning along the way. 

Incidentally, have you notice one of the most important Bloomberg headlines of the day? 

Shanghai Composite Index Heads for Biggest Gain Since 2009

So, should I rush to to my desk to trade today based on that single piece of information? Or should I have sleepless nights wondering whether China’s GDP growth rate will meet expectations? 

Well, China’s figures have never been very reliable, in my view, so while it’s true that its growth rate may have become less appealing, I didn’t buy into its growth projections back in 2009, and I am not particularly worried today. 

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This undisclosed value play could well reward you regardless of broader market conditions -- its solid fundamentals and a lowly valuation point to significant long-term upside for its shareholders. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.