There is scope for significant improvements in sentiment to rally prices after such a steep decline in equities in the third quarter, according to Richard Buxton, manager, Old Mutual UK Alpha Fund
As we enter the last few months of the year and consider what 2016 may bring investors, events in the third quarter have muddied the outlook for both interest rates and economic growth prospects.
The economic slowdown in emerging markets, led by China, has introduced a new dynamic into the monetary decisions of the Federal Reserve and most likely the Bank of England. Central banks in the developed world now have to focus on the impact of the emerging market slowdown on their domestic economies in terms of growth and inflation.
With interest rates already at historic lows, the fear is that in the event of a marked slowdown central banks will be powerless to revive growth.
The recovery from the financial crisis has been slow and been ‘two steps forward, one step back’ in its nature – with most of the backward steps related to Europe. The latest mini-crisis has been made in China, and it is most likely from China that a resolution will come.
Should economic data suggest that the deceleration in the growth rate has ended, investor sentiment towards risk assets should improve. Not all the data from China has been bad. House prices seem to be finding a floor, car sales have been strong and as an importer of oil the economy should benefit from lower prices. Anecdotally the corruption purges in the country have led to a hiatus in investment decisions that one would hope should ease over time.
And whilst the momentum of UK economic growth may have peaked – the blistering pace of improvement in the labour market had to moderate, as it now has – growth remains steady, underpinned by rising household incomes and modest corporate investment. This will support domestically sensitive sectors.
In a similar vein, the strength of the dollar will slow, but not crater the pace of growth in the US. The European Central Bank has room to expand quantitative easing if required. After such a steep decline in equities in the third quarter, there is scope for significant improvements in sentiment to rally prices.
Indeed, the price action in resources in the third quarter had all the hallmarks of a selling climax, so we have added to positions, mainly in oil, as we see good long-term value. So we continue to add to favoured holdings ‘on the dips,’ acknowledging the risks to growth but confident that the post-financial healing process is ongoing and supportive of equities.