Comment on this week’s market movements
Caspar Rock, CIO, Architas, comments on this week’s stockmarket movements and his firm’s move to increase cash and alternatives exposure
It has been a volatile start to the year for global equity markets. On Wednesday 20 January the FTSE 100 dropped 3.5% to register a fall of over 20% from April’s record market high and the UK stockmarket joined Brazil, Hong Kong, Canada and France as members of the official bear market club. Many other markets teetered on the brink of the 20% threshold as valuations retreat from 2015 highs.
Bear markets usually occur when investors lose faith in the market. This typically happens when an economy is in a recession and/or unemployment is high, or when inflation is rising quickly. In the UK none of these things are happening.
It may be wise not to take a short-term outlook, and avoid overreacting to immediate stockmarket moves. Right now, investors know the market is struggling but most believe it will come back. In fact, many see this as a buying opportunity.
What triggered this?
On Tuesday 19 January the International Monetary Fund (IMF) cut the world’s economic growth forecast for 2016 by 0.2% to 3.4% and suggested that policymakers should consider ways to bolster short-term demand. Weaker-than-expected Chinese indicators weighed heavily on emerging markets and commodity exporters.
The price of oil dropped below $30 a barrel as the International Energy Agency warned the oil market could “drown in oversupply”. Many have believed that stock markets were due a correction because they are overvalued, due in part to the loose central bank policies of recent years.
Is it all bad?
Things do look gloomy but this is the time where we really have to remain patient to see how events unfold around us. Market movements do not always reflect fundamentals and can rise and fall at times regardless. The oil price puts stresses on oil exporters … but there is a silver lining for consumers worldwide, so it’s not all negative.
There doesn’t appear to have been a major shock to trigger this bear market and UK underlying positive fundamentals don’t seem to have changed. We are not experiencing an economic crisis and there is no major monetary tightening on the horizon; the bear market may have been precipitated by internal market dynamics.
Some market participants are hoping that a positive earnings season could turn the tide.
Architas moved to a neutral position on equities, down from a slight overweight, maintaining our bias towards developed markets and defensive sectors. We have been increasing our allocation to cash and maintaining some exposure to longer duration bonds as a hedge against a potential global growth shock.
We have maintained an overweight allocation to alternative assets, in particular real assets that have revenue streams linked to infrastructure backed by governments, as we believe that they will be sound defensive investments in a stressed macroeconomic scenario.
More broadly, we believe that investors need to expect an increase in volatility over the coming months.
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