Market commentary from Trevor Greetham, head of multi asset, at Royal London Asset Management.
“The drop in stock prices that started with a seasonal October sell off intensified in December on disappointing economic reports out of China, heightened geopolitical tensions and a series of inept policy announcements in Washington. This has been the worst December on Wall Street since 1931 in the midst of the Great Depression. We think markets are premature to fear a US recession and we have been buying stocks at lower prices in the expectation of a more positive first half of 2019.
“Stock market volatility returned with a vengeance in 2018 after several unusually quiet years. We used dips early in the year to raise equity exposure to a large overweight in our multi asset funds but went into the October sell off neutrally positioned after taking profits over the summer.
“We expected what we called a “pivotal October” given the stagflationary backdrop. A slowdown in growth with rising inflation and rising interest rates is generally bad for stocks. We said we would be willing to buy dips if markets became overly pessimistic and that is what we have been doing.
“We were surprised at the ferocity of the selloff in December which we put down to rising nervousness about the US-China trade dispute, an ill-judged and poorly communicated rate hike from the US Federal Reserve and an increasingly erratic pattern of behaviour from President Trump as the Mueller investigation into Russian collusion enters its final stages.
“The last couple of weeks have seen a surprise unilateral decision to pull all US troops out of Syria, threats of a “very long” government shutdown if Congress refuses to fund the Mexican border wall and a counterproductive attempt to blame the Fed for market weakness when it’s the trade war that investors are most worried about.
“Elsewhere in the world Theresa May’s chaotic postponement of the meaningful vote on the EU Withdrawal Bill has added to the jittery mood in markets, raising as it does the risk of a No Deal Brexit that would damage both the UK and euro area economies.
“Our measure of investor sentiment is now extremely depressed (chart 1) and the markets are behaving as if the US economy is moving into recession but there is little sign of weakness in the economic data and bank credit continues to flow freely. We think fear of economic collapse is premature and expect stocks to recover going into 2019.
“Easy fiscal policy is still boosting the US economy while monetary policy is now effectively on hold until markets recover. The slump in the oil price will act like a very large additional tax cut for the US consumer in the first half of the year (chart 2). Meanwhile, China has announced a desire to make significant tax cuts of its own and to ease monetary policy in order to offset recent weakness and its policy makers have a tendency to overdo stimulus.
“We don’t know how things will turn out in the US-China trade negotiations, Brexit or the Mueller inquiry, but uncertainty is unlikely to remain at the current fever pitch for more than a couple of months.
“Volatility is a feature of the late stage of a business cycle that investors will have to get used to but volatility cuts both ways.
“Longer term recession risks are likely to build if the world economy turns out stronger than expected in 2019 and US interest rates rise further. In the shorter term our analysis shows that it is almost always a bad idea to sell during a market panic and stock prices should rise as China’s latest economic stimulus takes effect. Investors willing to commit new money should expect to pick up some bargains in the New Year sales.”
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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 £114 billion of assets and employs 92 investment professionals as at December 2018. It invests in all major asset classes including UK and overseas equities, government bonds, investment grade and high yield corporate bonds, property and cash.
For professional clients only, not suitable for retail investors.
Issued February 2019 by Royal London Asset Management Limited, registered in England and Wales number 2244297; authorised and regulated by the Financial Conduct Authority. Registered Office: 55 Gracechurch Street, London, EC3V 0RL.
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