A few bulls left after China shock

Added 25th August 2015

Apple’s 11% decline led the fall as US stocks followed Europe and Asia down. But amidst the selling there were some asset allocators that saw more reasons for positivity than for panic.

A few bulls left after China shock

Trevor Greetham, head of multi-asset at Royal London Asset Management said the sharp sell-off in equity markets has the firm’s composite investor sentiment indicator signalling one of the strongest contrarian buy signals on record.

The depressed reading, is comparable with the onset of the great financial crisis in 2007, the Lehman failure in 2008 and the worst point of the euro crisis in 2011, he said, adding: ““This suggests a strong bounce, especially if we get policy shifts to turn market sentiment around. China will ease further, including on the fiscal side. Japan is likely to step up monetary ease in response to yen strength. Meanwhile policy will end up looser than expected in the US and Europe.”

That said, he remains cautious on both emerging markets as a whole and Asia ex-Japan.

“We are not optimistic about Chinese growth but it is hard to see how lower commodity prices and less hawkish monetary policy are a negative for the US consumer or the US stock market.”

Greetham said the firm sees strong similarities between the current situation and the Asia crisis of the 1990. “There were many shocks along the way over that decade as emerging market equities and commodities bore the brunt of the deflationary forces but US equities returned 400% over the period as a whole.”

Like Greetham, Jorry Rask Nøddekær, manager of the Nordea 1 - Emerging Stars Equity Fund believes the sharp falls in stock prices means there is a lot of value on offer in certain parts of the market.

“If we look at today’s valuation levels, we see a number of high quality companies with very good medium to long-term growth outlooks trading very cheaply. We think many stock prices have dropped significantly below the medium to long-term growth and return fundamentals,” he said.

However, he is less convinced about the similarities to the Asia crisis. Instead, he maintains that China is in the middle of a long process to open up its economy and reform its financial system.

“China is clearly slowing from a growth perspective. As we have been saying for some time, the old style China as we knew it is not coming back. This transition from the old economy to a new service and consumer-driven economy is definitely painful for some parts of the old economic engine.”

For Peter Toogood, investment director at City Financial, something even more fundamental is going on.

“Last week was a collective recognition by investors that all is not right with the world. The emerging market debt problem mimics the developed world in 2008 and their mercantilist and commodity-heavy dependence has been brutally exposed.

He believes that the deflation spectre will spook credit and equities alike - corporate balance sheets and P and L's are in no position to survive deflation - see corporate Japan in the 1990's for reference.

 And, while he expects another bout of hurried easing by central banks and particularly the Chinese which would provide some relief for investors, it will not get to the root cause of the problem.

“Times are set to remain challenging but pockets of value are slowly emerging - energy and selectively, some emerging markets such as Mexico and Indonesia that have taken some of the hard decisions on supply side reform.” 

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