Market Update - October

Chinese slowdown worries investors

Since the beginning of August, China and the emerging markets have been the focus of investor attention.  Confidence in the ability of the Chinese authorities to prevent a dramatic slowdown in growth has been shaken by the unexpected currency devaluation and a clumsy response to the fall in Shanghai listed equities.  Although we expect the Chinese economy to struggle over the coming quarters we do not expect a ‘hard landing’.

Commodity price weakness to temper inflation

We have seen continued falls in commodities as a consequence of a weakening China and the strong dollar, the currency that many commodities are priced in.  This has clear negative consequences for the commodity producing companies and countries, but is positive for growth in developed economies, where lower commodity prices can act to suppress inflation and boost disposable income.

Central bank caution

In reality, the ability of central banks to respond to global economic weakness is constrained as interest rates are already at or close to zero and there are doubts over the effectiveness of further quantitative easing.  Investors had been expecting to see the first rate rise in the US by the end of September, as the US economy continues to show robust growth. 
However, the lack of inflationary pressures and an uncertain global economic environment has delayed any US rise to the turn of the year; and we expect the first rise in the UK in mid 2016.

European brightspot?

It has been another summer where Europe has lurched from one crisis to the next.  Greece eventually avoided leaving the euro, but only after a veiled threat of eviction.  Although the market focus has shifted east to China, the continuing refugee crisis has dominated the European political agenda, with enforced quotas causing infighting between member states.  However, there has been encouraging economic news, with GDP growth revised upwards and generally positive corporate newsflow, with Volkswagen a notable exception.

Market implications

After a period of relatively low volatility, the dramatic moves in equity markets over August and September have reminded investors of the short term risks inherent in equity investment.  However, we view the recent set back as an opportunity for long term investors to access good quality companies at more attractive valuations.  We retain our positive stance on equities, with a preference for developed markets. That said, in a low growth world where there has already been a strong market recovery, we expect returns to be lower than those suggested by long term history.  Although we do not expect imminent interest rate rises, we continue to struggle to see value for long term investors in bond markets and instead prefer to hold absolute return funds for their defensive characteristics where possible.  Property has been a welcome diversifier with strong returns year to date, and although we expect the rate of capital appreciation to slow, the income characteristics justify a continued position in portfolios.

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Charity Newsletter Q42015 - October 4 pages | 1,154 kb


The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

James Brennan

Portfolio Director