In recent weeks, global equity markets have suffered the first material setback since the 2011 eurozone crisis (when global markets fell over 20%) and very understandably this has caused an increased level of anxiety among investors.
Whilst we are continually reviewing and appraising our investment views, such a significant pull-back in global markets naturally makes us ask the critical question, has anything changed?
Perhaps it is useful to first recap on our investment views from the start of this year.
Our optimistic outlook for global equity markets was based on an expected recovery in global growth, as the rest of the world played ‘catch-up’ with a robustly performing US economy.
Indeed, most of the evidence so far this year has supported this view with the US economy continuing to perform well and a notable improvement in the European and Japanese economies.
Where this view has been clearly challenged, however, has been in emerging markets.
Whilst portfolios Investec manages on behalf of clients have a relatively low level of exposure to equity markets in emerging markets, we are conscious, nonetheless, that a slowdown in emerging nations will weigh on global growth and corporate earnings.
So what does this mean for our core thesis? Well, it doesn’t change it, rather it defers it.
In commentary to clients in recent weeks we have stated that we do not believe the recent devaluation of the Chinese currency represents a deflationary ‘beggar thy neighbour’ move and we do not believe the now likely ‘reflexive’ slowdown in emerging markets, as investors and businesses defer investment, will lead to a global recession.
Instead, we believe the global economy has sufficient momentum to withstand the likely impact of China slowdown concerns and that global reflationary monetary policy will remain very supportive for an extended period of time.
It is, nonetheless, a significant event and whilst a number of the sentiment measures we look at are now screaming “buy”, we believe markets may remain somewhat skittish until investors are reassured that the slowdown in certain parts of the Chinese economy is manageable, whether that is via policy actions from Chinese authorities or evidence that such actions have underpinned growth as the Chinese economy continues to rebalance.
We do, ultimately, expect to see this evidence and thus we expect markets to recover.
We are, therefore, maintaining our overweight equity stance across our investment portfolios.
Furthermore, whilst we do not discount the possibility of further fluctuations in stock prices; we view current weakness as an opportunity for investors who have been looking to build equity portfolios.
The prevailing level of investor pessimism would certainly make the case for ‘buying the dip’.
We feel it is important to state that this note is not written from a ‘permabull’ perspective and we do expect this bull market to end at some stage.
It is simply our view now, based on objective evidence, that this current market ‘malaise’ is not a bull market ending event and represents a correction within the ongoing trend.
As wealth and investment managers, our core aim will always be to protect our clients’ ‘irreplaceable’ capital, constructing the right asset allocation for each individual client, with a focus on high quality assets which have stood the test of time.
This emphasis on high quality assets may seem obvious; surely no one would invest in low quality assets?
However, it continually surprises us how often investors are seduced by the prospect of illusory higher returns, investing in complex, highly leveraged and speculative investments.
We eschew such complex, speculative investments, as we know that higher quality assets will deliver us better returns over the long run and allow us to ‘ride out’ periods of stress in the knowledge that temporary losses of capital are just that, temporary.
Ian Quigley is director of investment strategy at Investec Wealth and Investment.
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