Recent weeks have witnessed a volatile period across asset classes, followed by a rebound seemingly based on the view that the market sell-off went too far, too fast.
Many of the factors cited as reasons for the sell-off were not ‘new news’; it would appear its origins had more to do with a change in sentiment rather than a change in fundamentals.
Markets have had a long run without a correction and a sell-off such as we saw recently is completely normal. What has not been helpful is the lack of market stabilisers, which used to be provided by the investment banks. But as these banks have cut their inventories to meet tighter liquidity rules, a buffer for market volatility has been removed. This last factor could be an ongoing problem.
The economic backdrop does appear to highlight a divergence in growth, with the US continuing to accelerate while China slows, Japan struggles to gain decent traction, and Europe overall battles for positive momentum.
While peripheral Europe improves, core countries in the continent appear to be struggling. The UK is not immune to the weakness in European growth, with the latest data pointing to the UK growing, albeit at a slower pace.
There are clearly issues in China, but for now it appears the authorities still have plenty of tools in their boxes to address them in the short term. For now there remains no sign of a serious slowdown that would damage global growth. The boost to economic growth from falling oil prices should not be discounted, although as always a significant move in the oil price creates both winners and losers.
October lived up to its reputation as a volatile month but it is worth noting that global growth overall remains reasonable. There is no evidence of a major slowdown in global GDP. We are not on the brink of a global recession, and while growth in Europe is mediocre, any further deterioration may well force the European Central Bank to take more action.
It is also positive that the Bank of England and the US Federal Reserve continue to hint that rates will stay lower for longer. Thinking longer term, we should be mindful that western central banks will do whatever is necessary to avoid deflation given the levels of debt, both public and private, in developed economies. Weaker inflation levels also mean there is scope for monetary easing elsewhere, including China.
More recently markets appear to have got back on track.
The key takeaway from the volatility seems to be that markets still need the belief that central banks will remain supportive in order for continued upwards momentum. Given the ‘comfort blanket’ of quantitative easing from the most important central bank, the US Fed, has now ended, we can expect heightened asset class volatility and even more focus on every word uttered by chairman Janet Yellen and her colleagues.
Overall we remain broadly positive and, while remaining vigilant, we still believe that for now market dips represent opportunities to add to our favoured funds and regions.
Gary Potter is co-head of multi-manager at F&C Investments
