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Expert Opinion: Tips for your investment in October 2015

30.09.15

Investors: Expect the Best; Prepare for the Worst…

Artur Baluszynski, Head of Research at Henderson Rowe, says:

The market gyrations of the past month come against a background of strong US job creation, an upward revision of annualised US GDP to 3.9%, and Janet Yellen (Chair of the Federal Reserve) indicating that when she raises rates she will do so slowly. Pretty good news, you would have thought.

Since the market was focused like a laser on the ‘Will she, won’t she’ FOMC rate rise question, it is ironic that continued stimulus in the form of a delay scared it more than the expected 0.5% rise. The reason: Yellen’s confirmation that the pause was caused by China’s growth slowdown. This is surprising, as the widely known Li Kequiang index of changes in bank lending, rail freight and electricity shows growth is now only 3%. (This index is named after a former Chinese premier, who said he preferred these measures to official GDP numbers.)

Will the US be knocked off track by this? The US has almost no Chinese exports. Currency is the issue, as capital may pour into a strong dollar out of Asia, making US exports in general and Yellen’s inflation target harder to achieve.

The US needs to bite the bullet while the going is good. The eurozone is building momentum, with 1.3% annualised growth in GDP last quarter and a pick-up in credit growth indicating better than expected labour conditions. The UK has seen its growth numbers strongly revised upwards by the ONS, as well as rising business investment, confidence and at long last productivity too. If Yellen and Mark Carney do not raise rates now, they will be short of ammo to fight the next recession.

Markets have risen without a substantial correction since the Euro crisis of 2011, sailing through red flags in Russia, commodities, Greece and China, and it looks as if this sell-off has acted as a pressure valve releasing accumulated worries. We are not expecting a recession in the developed world. The US Yield Curve is still steep and lower oil prices should find their way to consumer pockets. Not much has really changed in the past month with respect to fundamentals. The outlook for developed world growth and earnings is still positive. China’s economy has been weaker than officially expected, but most investors knew that already. Nevertheless, such big moves in a short period of time make everyone nervous and need to be taken seriously. Reduced market maker inventory hurts liquidity when markets are under stress, and there are large amounts of sovereign and other debt around. The troubles of VW and Glencore have not helped sentiment, with rumours of banking exposure in commodities and more auto scandals in Europe’s industrial engine room.

Tips for your investment, being conservative investors we expect the best and prepare for the worst, making sure our clients’ asset allocations meet their needs and risk profiles.  For our more conservative clients we hold a mix of developed world equities, index-linked bonds and a little cash to protect their purchasing power over the long term and buy bargains short term. For our more aggressive clients we have a GDP weighted exposure to the developed world and are still underweight emerging markets and commodity markets. The latter two should offer attractive returns in the long run and if we see capitulation may start to build a meaningful position. But remember, these days markets turn on a sixpence and when they recover, go up hard.

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