It has certainly not been a good start to the year in markets, but, from a global economic perspective, there’s no “new news” as far as we’re concerned. Bearish sentiment relating to China has all got a bit out of hand in the short term in our view: the transition from an export-led economy to one driven by domestic consumption was never going to be a smooth one and we’re merely seeing the consequence of that in the data. At present the current “rampant pessimism” (as a manager with whom we had a conference call this week put it) is the result of too much focus on the negative data and nothing on the good numbers – there are some! We continue to believe that China’s GDP is in a gradual (and entirely expected) downward glide path, rather than headed for a hard landing.
Big market moves are very often seen at the beginning of the calendar year, as strategists and traders try to justify their existence by setting out their new views and positioning for the next 12 months, but in our experience these tend to be short-term in nature. That’s not to say we aren’t alert to the possibility of a significant deterioration in the economic backdrop, but that’s not our base case scenario. If we have interpreted the widely-circulated RBS strategy note correctly (and we have seen the full piece), they are talking about bond markets in the main, where we’ve been underweight and defensively positioned for some considerable time (we also have very little Emerging Market exposure). At the risk of appearing unkind, their views might carry a little more weight if backed up by a credible track record of past strategy calls.
We see as many things to be encouraged by around the world (US growth, recovery in Europe, very healthy M&A activity) as there are to be fearful of (China, parts of EM, commodities) and the flipping of investor sentiment between “glass half-full” and “glass half-empty” is a symptom of that. As we’ve been saying for a long time, we expect volatility to remain a feature in markets for the foreseeable future, but a 2008-style scenario? We don’t see it – we would argue that was largely to do with the failure of the financial system and the rebuilding process that’s taken place means that’s not going to happen again.
It’s also worth bearing in mind that, while weakness in oil and commodities prices is undoubtedly harmful to the economies of those countries that produce them, it’s also a significant boost to consumers in those that are net importers (akin to a healthy tax cut in the US and Eurozone) and in particular for the low paid with a high marginal propensity to spend. There are two sides to every coin….
In terms of our response to market movements, we have de-risked a little within the equity portion of our models, but not significantly. Quite a few of the managers we invest with have also throttled back within their funds during the final quarter of last year, which has further reduced overall risk.
Importantly, our international range of multi-asset funds, DFM solutions and bespoke portfolios are diversified across a broad range of traditional and alternative investments: risk assets, such as equities, are only part of the equation. Moreover, through our “best of breed” selection process, our clients’ capital is deployed through many of the finest active managers in the business. Thus, whilst we are not yet prepared to “be greedy when others are fearful”, we do not believe that now is the time to be abandoning our long-term strategy.
Market Reaction 2016