Investors shouldn’t panic and lose sight of the important tailwinds that could help to bolster the global market, according to Hermes’ Andrew Parry (pictured). 
The head of equities says that while the summer months are usually turbulent for investors, macro factors across the globe such as the ongoing Greek crisis and the Chinese growth slowdown could well prompt more concern among investors than usual at this time of year.
Worries hit closer to home on Monday when the FTSE 100 plummeted by around 4.5 per cent in a sell-off charged by panic surrounding China.
While the UK blue-chip index had £74bn wiped from it by the close of play during ‘Black Monday’, the Shanghai Composite index closed overnight on an 8.5 per cent loss, its worst return since 2007.
Performance of indices in 2015
Source: FE Analytics
However, Hargreaves Lansdown’s Laith Khalaf dispels jitters surrounding the market slump and, like the other macroeconomic factors around the globe, believes investors can become too caught up in gloomy headlines.
“It was just five months ago investors cheered as the FTSE broke through the 7,000 mark for the first time; it now looks like a very long climb back,” he pointed out.
“However bleak things may seem today, there are reasons to be positive. A lower oil price will boost household budgets in the UK, Europe and the US, which should feed through into spending. The $70 fall in the oil price over the last year puts $6bn more into the pockets of oil consumers each day; a level of economic stimulus even central bankers would be proud to notch up.”
Over at Hermes, Parry agrees that there are plenty of positives in the market that have been overshadowed by negative sentiment and as such he lists the factors that investors should really be focusing on below:
Greece: The next act
The head of equities insists that Greece’s impact on Europe, let alone the global economy, is limited, although he adds that the indebted country’s ability to repay what it owes will be vital to the future of the eurozone.
“With €320bn of government debt, it is fanciful to think that another bailout, this time of €86bn, will suddenly resolve the challenges,” he said.
Parry adds that it was the politics of the euro that led to a bailout, as a Grexit would have shown weakness in currency and would have pressured other slow-growing countries to follow suit.
Performance of euro vs sterling in 2015
Source: FE Analytics
Another reason the troubled country is likely to stay in the eurozone, according to Parry, is that it would have to default without the euro, which would devalue Greece’s currency and means it would have to entirely rebuild its economy.
“Given the scale of its debts and the impact of another recession, a Grexit always seemed the logical outcome to many, but that would undermine the entire eurozone project,” he explained.
“Since 1 January 2000, the Greek economy has had zero cumulative real GDP growth, even after an initial boom. In that same period, the Italian economy has also recorded no real GDP growth, and it too has vast debts. Take away the comfort blanket of implied mutualisation of debt across the eurozone and a currency with limited purpose is revealed. Perhaps this is why French president François Hollande worked so hard to keep Greece in the euro?”
The uncertainty of a domestic political battle in Greece following Alexis Tsipras’ shock resignation as prime minister and calls for an early election has rekindled many of the concerns investors had about the country’s debt restructuring and whether it will be successful.
“For Greece to remain in the euro, debt forgiveness is inevitable and this outcome is likely because the rest of the members of the eurozone cannot afford for Greece to leave,” Parry added.
China: Markets catch up with slower growth
Despite the new year euphoria surrounding Chinese markets, the Shanghai Composite index has now suffered an 11.9 per cent loss year-to-date following a 45.59 per cent fall since its June peak.
Performance of index in 2015
Source: FE Analytics
This has drastically impacted markets and resulted in the Dow Jones Industrial Average slumping by more than 1,000 points in early trading at one stage, as well as wiping £74bn off the value of the FTSE 100 earlier this week.
Currencies of emerging markets have weakened as investors have sold off the assets that they deem to be risky and China moved to devalue the yuan. Commodities have also tumbled to multi-year lows as investors panic about a wane in demand for raw materials.
While this may sound concerning, Parry says that investors shouldn’t continue their selling frenzy and should remain level-headed.
“Slowing growth [in China] – more 4.5 to 5 per cent than the official 7.1 per cent – has taken investors by surprise, though many ‘real world’ indicators have suggested moderating growth all year,” he said.
“The devaluation of the yuan after the government’s decision to fix it each day to the spot price of the previous close, and the knock-on impact on other Asian currencies, has added to the confusion, with some commentators divided between viewing this as part of a panicked reaction to weakening demand and those, including us, who see it as part of the long-term and well flagged structural reform of the Chinese economy.”
Growth across the globe has been slowing since the start of the year due to plummeting commodity prices caused by the Fed’s decision to stop quantitative easing, high debts worldwide and poor economic management, according to Parry.
While he says that the decisions of the Chinese government shouldn’t unnerve investors as much as they have, he admits that he has been concerned about global growth, as 2015 could be the fifth consecutive year that global GDP growth has declined.
“At the same time, global trade has slowed more sharply, suggesting that the export-led recovery expected by devaluing nations, the eurozone in particular, will not happen,” he added. “The US is beginning to wake-up to this reality. The trade-weighted US dollar is marking new heights, compounding a slowdown in corporate profit growth, which looks vulnerable after six years of expansion. An interest rate rise by the Fed – more a virility symbol for the US economy’s robustness than an immediate economic necessity – would only compound the angst gripping investors. We expect Fed chair Janet Yellen to stay her hand in September, as a consequence.”
Tailwinds: Western growth and market bargains
While it is easy to panic, Parry says investors should be prepared to look for the positives.
“Lower energy prices will provide a modest boost to consumers’ disposable incomes, and while growth in the West might not be exciting, it is growth nonetheless, and in the eurozone it is being led by the domestic economy,” he pointed out.
“The collapse in stock prices has also restored some value to markets starved of bargains, which is always the benefit of a dose of fear.”
The bond rout earlier this year has been long forgotten and investors have bought back into government securities in a panic, according to Parry.
“This illustrates how succumbing to fear can be dangerous,” he said. “Furthermore, the authorities are not going to stand by idly, so we can expect more policy responses to come. With the euro fetching nearly $1.15, the European Central Bank will not want to risk the burgeoning but still immature recovery to be snuffed out.”
“In this environment, we believe it is prudent to follow the growth.”
