China continues to drive sentiment across the globe
Since China’s ‘Black Monday’ on the 24th August global stock markets have continued to experience high levels of volatility. Leading economic institutions have been downgrading their forecasts for world growth as evidence mounts about the severity of the slowdown in China. There is no doubt there has been a continued deterioration in the outlook with manufacturing contracting at the fastest rate for 3 years in August, raising concerns of a ripple effect to developed economies. It is the degree of uncertainty that is hurting sentiment - the average 2015 GDP growth forecast for China has been reduced to around 6% but the range is wide and lack of guidance from the authorities does not help.
The IMF (International Monetary Fund) warned that further deterioration could depress global growth which had been expected to pick up in the second half of the year. Deflation remains another concern for markets but the current low levels of inflation are largely driven by depressed oil and commodity prices.
The FTSE 100 has continued to exhibit greater downside than the rest of the UK market due to its large proportion of overseas earnings and high exposure to sectors which have been hardest hit, notably energy and commodities. The FTSE 250 and the FTSE Small Cap (ex ITs) remain in positive territory year to date (up 4.8% and 10.4% respectively) as shown in the graph below.
Is the economic situation really that bad?
Certainly, the news is not all gloomy. There was a big boost to sentiment from news that the US GDP grew at an annualised rate of 3.7% in the second quarter, much stronger than the initial estimate of 2.3%. This helped the outlook for global growth and the oil price, along with stock markets, staged a sharp rally although much of the gain was not sustained.
Meanwhile, the UK economy expanded by 0.7% in Q2 compared with Q1, leading the CBI (Confederation of British Industry) to edge up its GDP forecasts to 2.6% in 2015 and 2.8% in 2016. This improved outlook was attributed to increased investment spending and higher household spending driven by strong wage growth and lower inflation. UK consumer confidence reached its highest level for 15 years in August helped by improved employment prospects, low interest rates and low oil prices.
Second quarter growth for the Eurozone was revised up to 0.4% and although the ECB downgraded slightly its full year growth and inflation forecasts, it reiterated a commitment to its Quantitative Easing programme to support the region.
And also on the positive side…
There have been several attempts by markets to stage a rally over the last month and confidence was boosted when China’s Ministry of Finance promised to carry out ‘stronger pro-active fiscal policy to stimulate growth’. Japan, which like several other Asian markets had been hit by its perceived reliance on trade with China, soared nearly 8% following this statement.
Earlier this month investment bank Morgan Stanley, which has a good record on calling market turning points, issued a ‘full house’ buy alert for global stock markets for the first time since 2009. They say all 5 of their key market-timing indicators, based on valuation, fundamentals, capitulation and a combined market indicator, are signalling buy although they can sometimes turn positive a little early. Their Chief economist emphasized the cheapness of equities relative to bonds and pointed out that there is a lot of liquidity seeking a home.
Furthermore, a number of leading UK fund managers, including Richard Buxton of Old Mutual and Neil Woodford of Woodford Investment Management, have announced that they have been finding attractive buying opportunities on the dips in the market.
So what’s next?
While the US and the UK are both considered to be in a strong enough position to considering an interest rate rise both deferred this course of action at their latest central bank meetings, no doubt waiting for a clearer picture of the Chinese economy to emerge.
In the investment world there are no guarantees and there are both bullish and bearish commentators getting plenty of publicity at present. However, when markets experience across the board sell-offs on macro worries, good companies whose long term attractions remain unchanged get marked down with the bad. This may provide selective buying opportunities which can be identified by fund managers who have experienced previous economic cycles and global turmoil.
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