RLAM's Greetham turns to emerging markets amid market turmoil

He said the sell-off in equities is not a sign that global economic growth is weakening, as the fundamentals remain strong adding it is the recent tax cut implemented by US president Donald Trump that is to blame.

Today (7 February) global stock markets were staging a rebound following the wild swings this week that have marked a return of volatility to equity trading after years of unusual calm.

The UK’s FTSE 100 index was up 0.6 per cent in mid-morning trading after suffering its biggest drop since Britain’s 2016 vote to leave the European Union yesterday (6 February), falling 2.6 per cent.

The Europe-wide Stoxx 600 was up 0.8 per cent while the Xetra Dax in Frankfurt was up 0.6 per cent.

The European recovery follows yesterday's (6 February) late gains on Wall Street after a session of dramatic gyrations.

The Dow Jones Industrial Average closed 567 points higher, or 2.3 per cent, yesterday (6 February) at 24,913, a day after having recorded its biggest one-day points drop ever.

The S&P 500 was up 1.7 per cent to 2,695, its best day since Mr Trump was elected US president.

Mr Greetham said the wobble of the last few days was because the White House doesn't understand that when an economy is growing at the 3 per cent level it is in the US, with inflation and wage growth happening, implementing significant tax cuts, as Mr Trump has done, is likely to cause the economy to overheat.

This overheating will see inflation moving sharply upwards, requiring the US central bank to push interest rates higher, Mr Greetham noted.

This expectation that interest rates would move higher, prompted the rise in bond yields, and then the move downward in equities, he added.

Mr Greetham said a tax cut in the US right now is pro-cyclical economic policy, that is, it involves pushing money into a system which is already expanding.

Keynesian economic theory states that governments should use counter-cyclical policies, this means that if the economy is expanding, the government should withdraw stimulus, and if the economy is shrinking, it should expand.

Mr Greetham sees the best value in emerging market equities because he believes commodity prices will continue to rise due to the level of economic growth in the world, boosting emerging markets.

He has also invested in commodities because they tend to perform well when inflation is rising.

Mr Greetham said he is less keen on European equities.

He said this is because domestic demand has not picked up as expected in the Eurozone, the growth that has been achieved there is the result of its export economy, specifically of goods to China, and he believes this will not be sustainable as the Chinese economy has shown signs of slowing down.

Mr Greetham is also wary of investing in the UK market as he fears the long term outlook for the UK economy is weakened by the country's imminent departure from the European Union.

Georgina Hamilton, who jointly runs the £590m Polar Capital UK Value Opportunities fund, said investor sentiment towards the UK is currently at extremely depressed levels.

However, she said investing in the UK stock market is not the same as investing in the UK economy.  

She said: "It is important not to tar all stocks with the same brush. Even assuming a very tricky Brexit process, there are still plenty of opportunities in the UK market both for international and domestic earners.

"Many will have seen the harsh share price reactions for any UK listed company that misses expectations. While there is this elevated risk, it is balanced by an environment where there is considerably more opportunity to make returns."

Philip Milton, who runs Philip J Milton and Co, an advice firm in Devon said whilst falls in over-priced things tend to take the main brunt, irrational behaviour creeps-in too and things which were cheap already can become cheaper and that can be quite irritating.  

He said: "The main UK market is more resilient at the moment and it should be. It has been held-back against its international contemporaries by uncertainties over Brexit (unsurprisingly) but also because it is dominated by oils and mining stocks.

"Investors should remember that these (oils and mining stocks) actually possess some tangible commodities behind them and oddly enough we still need to use them every day and they make profits for their owners and these are distributed as dividends to shareholders.

"Last year was the biggest ever year for such distributions and this year could be even more)."

david.thorpe@ft.com