According to Juan Nevado, Fund Manager at M&G, over the past weeks, negative sentiment triggered by China’s economic slowdown and continued declines in the oil price have driven a bear market across ‘risk’ assets such as equities and credit. «Investor pessimism has reached levels where some have begun to ask whether we are about to enter the next global recession. The M&G Multi Asset team’s base case at present is that, while there are very real risks in parts of emerging markets, this is unlikely to trigger a global recession. As such, we view markets movements in some areas at least as somewhat ‘episodic’ and are therefore watching carefully for potential opportunities to exploit,» Nevado says.
In summary, the team’s view is that:
- Weighing the magnitude of the sell-off against the fundamental backdrop suggests to us that we are in an ‘episode’ in which market movements are being driven by fear, not facts. With valuations in some areas having been behaviourally driven to attractive levels, we believe this could present a chance to exploit compelling opportunities across selected risk assets. When it feels most uncomfortable to be buying assets is exactly the point at which we should be, one of the strongest indicators to us that we are in an Episode is that is feels so emotionally challenging to take it on.
- Fundamentals in developed economies are strong enough that we have conviction that the West is not entering recession.
- Areas such as Europe and Japan have been growing, but slowing a little and missing inflation targets. Therefore, we think policymakers in these areas are likely to be inclined towards further easing. We also think it’s plausible that the Federal Reserve will not seek to continue raising US interest rates in this environment, echoing the Bank of England’s statement this week that it will not raise rates for now. So central bankers are likely to remain in supportive stance.
- There are genuine risks in China and other Asian/emerging markets to worry about.
- However, even if Asia continues to weaken, we are unlikely to see a contagion effect developing into a global recession. A slowdown in China will not have the same impact at the aggregate global level as a similar slowdown in a major developed economy would.
- The collapse in the oil price is partly fundamentally driven because OPEC are operating at maximum output. We still believe the boost this provides to consumers, businesses and oil-importing countries should be a net positive for the global economy.
- Those predicting these two factors (Chinese slowdown and the oil price) will trigger a global recession need to provide better evidence and explanation of how this would happen to persuade us that they are right.
- We do not believe there is much evidence for this. It is sentiment, not facts, driving the market sell-off. Investors are overly fearful, partly because the memory of 2008 still lingers, and when investors are in pessimistic mood, they will seek the negatives and ignore the positives in any situation.
- In this context, when we see valuations cheapen so significantly in a relatively short period of time (six weeks in this case, perhaps not as clearly ‘episodic’ as August 2015 in terms of the speed, but certainly in terms of the magnitude) we start to look for opportunities to exploit.
- With valuation as our guide, we are not forecasting the future, we are simply aiming to put the odds in our favour. The risk premium on growth assets has skyrocketed since November 2015 and this suggests to us potential opportunities on which to position for the most attractive prospective returns.