“Crybaby” investors

Swiss asset manager Decalia Asset Management shares latest markets views.

This was supposed to be the year when the impact of central banks on markets would diminish and fundamentals would prevail. But so far, we have seen none of that.

After a 10% drop in global stocks, the ECB’s Mario Draghi saved the day by stating there were ‘’no limits’’ to the actions he might take in the future.

The BOJ also intervened in implementing negative rates.

Investors are now begging the Federal Reserve to halt its rate hike and even consider a QE4. Earnings season was not that bad, so far, as US firms revealed deteriorating revenues that were nevertheless in line with expectations.

Going forward, things should improve. So, are investors just crybabies? The full picture is a bit different and calls for caution.

We have yet to see the full effect on corporate activity of major changes in the oil market, not to mention the Chinese slowdown.

So far, only firms in the oil and gas sector have been impacted by falls in profit. But a second-round effect might be just around the corner.

For instance, Caterpillar’s earnings report revealed another bleak year ahead for industrials.

Though earnings came in above expectations, the company expects sales in the resource industries to drop by 15 to 20% this year, and by 5 to 10% in construction. Company reports may provide a better understanding of current dynamics than upcoming macro data.

In the end, the investing stance will come down to two key issues: “Will US and European consumers stay optimistic and consume?” and “Will the service sector compensate for the global manufacturing recession?”

A positive answer would enable the US to stay the course in supporting global growth while the EM world is unravelling, like in 1997–98.

In developed economies, on the one hand, the manufacturing sector is increasingly under pressure, with ISM reports showing 2008 levels and pessimism now spreading into Germany, the world’s leading exporter.

On the other hand, households are doing quite well, thanks to the decline in the price of oil; US retail gas prices have fallen by 25%, providing an annual $30bn purchasing power boost (i.e 0.2% of GDP).

Our stance on asset allocation is to remain invested but to reduce exposure risk as markets rebound.

We do not expect any extreme risk scenarios, such as global deflation, which is increasingly priced into fixed income markets.

Nevertheless, significant measures announced by major central banks could lead to a reversal in short-term sentiment.

We therefore stick to our view that fundamentals determine valuation, since business, not monetary policy, is what generates sales and growth in profits.

Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco. Prior to joining InvestmentEurope, he spent almost five years writing for various publications in Monaco, primarily as a criminal and financial court reporter. Before that, he worked for newspapers and radio stations in France, in particular in Lyon.

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