Rebound in global stock markets expected
5 October 2015
Trevor Greetham, Head of Multi Asset at Royal London Asset Management (RLAM), commented on what he sees as a positive outlook for global stock markets:
“We have a positive outlook for developed market stocks despite, or even because of, the emerging market slowdown. The associated fall in commodity prices is putting downward pressure on inflation. Central banks of developed economies will be forced to adjust monetary policy to strengthen their domestic economies and offset weakness from overseas.
“Volatility could remain high for a while but with investor sentiment already very depressed, seasonality turning positive and central bank action likely, we expect stock markets to rally into year end.”
The multi asset allocation at Royal London Asset Management is currently overweight developed market equities but underweight the emerging markets. To download the full report, please go to: http://po.st/investmentclock0915
Thin summer markets are prone to shocks
The equity markets successfully navigated Greece’s near euro exit only to sell off sharply with concerns over the deflationary impact of China’s surprise currency devaluation.
Speculation that US interest rates were about to rise for the first time in nine years also had negative repercussions on the markets. RLAM’s multi asset team believe that volatility could continue for a month or two but they don’t see the emerging market slowdown as a reason to be bearish.
Equity-friendly recovery to reassert itself
RLAM’s Investment Clock (see below), which links asset class performance to stages of the economic cycle, drifted into Overheat over the summer as inflation rates edged higher and the US Federal Reserve pondered a rate rise. However, commodity price weakness is putting downward pressure on inflation again, moving the Clock back towards equity-friendly Recovery. The China-related sell-off came during a period when returns are often negative, summer trading volumes are thin and the markets are prone to shocks. The world equity market has returned an average of 10% a year since 1973 but the months of May to September have averaged close to zero. We are now heading into the positive period for stock market seasonality.
Depressed sentiment suggests year-end rally
The multi asset team’s preferred measure of investor sentiment is as depressed now as it was after the Lehman failure and in the Euro crisis of summer 2011. They continue to have a positive view on the US economy, with lower oil prices likely to boost consumer spending. They expect further moves to ease policy in China and the developed economies to trigger a bounce back in stocks into the year end.
Trevor Greetham continued:
“Our composite investor sentiment indicator registered one of its strongest ever contrarian buy signals this summer. Analysis shows that it makes sense to buy rather than sell when sentiment is this depressed.”
Focus Chart: Investor Sentiment Extremely Depressed
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About the Investment Clock:
The Investment Clock diagram links the performance of different investments to the phase of the global economic cycle, with growth and inflation trends shown as vertical and horizontal axes. A ‘normal’ cycle starts at the bottom left in Reflation and proceeds in a clockwise direction through Recovery, Overheat and Stagflation. Different asset classes are positioned around the clock face at the time at which they usually outperform. Please see www.investmentclock.co.uk for more information along with up-to-date thoughts and ideas from the RLAM multi-asset team.
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with Group funds under management of £83.4 billion. Group businesses serve around 5.3 million policyholders and employ 2,922 people. (Figures quoted are as at 30 June 2015).
The Group is currently moving all of its UK and Ireland life, pension and investment businesses under a new version of the Royal London brand. The Group's independent wrap platform will remain branded Ascentric.
About Royal London Asset Management (RLAM):
Established in 1988, Royal London Asset Management (RLAM) is one of the UK's leading fund management companies, providing investment management solutions to both wholesale and institutional clients such as not-for-profit organisations, local authorities and the insurance sector.
RLAM manages over £83.4 billion of assets and employs 73 investment professionals. It invests in all major asset classes including UK and overseas equities, government bonds, investment grade and high yield corporate bonds, property and cash.