Investors should consider the ‘Black Monday’ sell-off in equity markets one of the best contrarian buying opportunities on record, according to Trevor Greetham, head of multi-asset at Royal London, who thinks Japan funds recent falls should see some of the best prospects for a rebound.
Yesterday markets fell across the world with an estimated $1trn wiped off markets, led by massive falls in the Chinese domestic equity markets. Stocks have continue to fall in China today but elsewhere investors have piled into bombed out stocks in UK and Europe. These markets have solidly rebounded at the time of writing.
According to FE Analytics, the Shanghai Composite index – the major equity market in the second biggest economy in the world has lost 41.18 per cent since April with the index falling a further 8.4 per cent today.
Performance of indices since April 2015
Source: FE Analytics
Greetham (pictured) says the sell-off was prompted by weaker than expected manufacturing data which caused Chinese stock markets to nosedive and a sharp global sell-off in equity markets to follow –including in Japan where contagion of a prolonged bear market spread despite a relatively unconnected economy.
However he says the multi-asset team’s ‘composite investor sentiment indicator’ has signalled “one of the strongest contrarian buy signals on record” comparable with the onset of the financial crisis in 2007, the Lehman collapse in 2008 and the euro crisis in 2011.
“This suggests a strong bounce, especially if we get policy shifts to turn market sentiment around,” he said.
“We remain positive on equities and we are buying the dip on Wall Street. We see great similarities with the Asia crisis of the 1990s with the US generally on a path to monetary tightening but with Asia slowing, this time led by China not Japan.”
“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 per cent over the period as a whole.”
Asia has been one of the hardest hit regions for UK investors during the sell-off but Greetham says this presents the best contrarian opportunity but China should be avoided while Japan bought.
China funds and trusts have seen of the biggest falls with the likes of Fidelity China Special Situations investment trust falling 36.83 per cent in the past three months after rising strongly in the previous year.
Performance of trust, sector and index over one year
Source: FE Analytics
Japan funds also have shifted from offering some of the highest returns in the IA universe in the first quarter of the year to continually falling since, with every fund down over one and three months and the vast majority down over six months.
“China will ease further, including on the fiscal side. Japan is likely to step up monetary easing in response to yen strength. Meanwhile policy will end up looser than expected in the US and Europe,” Greetham said.
The Yen has weakened 13 per cent over the past year against the dollar, providing a boon for exporters. Though it has started to strengthen since markets turned south.
Performance of Yen versus Dollar over 1yr
Source: FE Analytics
However, Greetham says the team are more cautious on Asia ex Japan and emerging market equities in general as they think Chinese growth will see ongoing sluggishness. Nonetheless, thanks to lower commodity prices and less hawkish monetary policy, the likes of the UK, Japan and the US should rally.
UBS economists Joshua McCallum and Gianluca Moretti agree, arguing that an increased bullishness for Japanese and US stocks is a likely scenario owing to cheaper commodities.
“If China is slowing down, then it is likely that commodity prices could fall further, including oil. Lower oil and commodity prices could significantly offset the negative impact in our simulation especially in the short term, with the US, Japan and Germany being the biggest beneficiaries,” the two said in a note.
F&C multi-manager duo Gary Potter and Rob Burdett are also sticking to an overweight in Japanese equities believing commodity falls will bolster the Japanese economy.
“Clearly there will be an impact on exporters and commodities stocks, but those low commodity prices, notably oil, will continue to be a tailwind for Japan and Europe,” they said.
“The deflationary forces of lower commodity prices will also allow developed markets central banks to keep interest rates lower for longer – and this volatility has greatly reduced the chances of the US Federal Reserve raising interest rates next month.”
“Not a great deal has changed of late other than sentiment. It appears the recent global equity sell-off is a market correction rather than the start of a full-blown bear market. The latter is certainly not justified by the data but there remains a risk of sentiment continuing to run ahead of fundamentals.”