22nd January 2016
Investors spooked by stockmarket turmoil should hold tight as the rest of the year is predicted to be better.
Charles Stanley chief executive Paul Abberley said investors shouldn’t be cautious about exiting the market right now.
‘The year has begun very disappointingly for investors, with markets down as much as 10%. Is this the beginning of a longer trend and how should investors react? We believe in caution against exiting the markets right now. It is notable that much of the news cited to explain the weakness is not “new news”,’ he said.
Abberley believes investors should take comfort in the fact that despite US rate rises last year, the Bank of England governor Mark Carney has confirmed UK interest rate rises will not be heading up any time soon.
The fall in oil prices has also been ongoing since 2014 and the softening in the Chinese market is ‘well known’.
Even the difficultly experienced by corporates in maintaining profit growth momentum is a hangover from last year.
Abberley believe that the problems in the markets now are due to the problems ‘sinking in’ and ‘their longer-term implications better appreciated’.
‘Second, there is evidence of selling by some central banks and sovereign wealth funds, reflecting local difficulties or declining oil revenues. Third, many investors have never truly believed that the economic recovery had proper foundations. They understand that the financial crisis and the recession which followed were about more than just bankers behaving badly,’ he said.
‘A longer term lack of demand and the weight of global indebtedness were also factors and we cannot be sure those influences have really gone away.’
Adding these factors to general fragility in the markets means it doesn’t take much ‘to unnerve them’ but Abberley said it is not a cause for concern in the long term.
‘In the longer term that markets will reflect what’s happening in the real economy and, while the risks are very evident, we believe that economic growth will remain positive, with central banks ready to provide more support,’ he said.
‘We also believe that the market outlook for the rest of the year is rather more encouraging. That said, it remains our view that market strength in the early years of the recovery effectively banked gains ahead of time, so returns now will be positive, but rather modest by recent historical standards.’
Abberley added that the fragile markets will mean ‘the investment environment will not feel particularly satisfying’. He also warned that there could be some bad news.
‘ First, another recession might indeed be around the corner. Second, sustained market weakness could become self-fulfilling by negatively influencing the real economy,’ he said.
‘But these remain risk scenarios rather than the most-likely outcome. Finally, do any opportunities arise from the poor start to the year? Emerging market equities have been hit relatively hard in these corrections, and we feel these are beginning to look quite attractive on a valuation basis. We think that it is probably still too early, but an interesting opportunity is building.’