Slowing Chinese growth, a modest at best pick-up in the oil price and continued divergence in central bank policy are the overlaying themes driving 2015’s volatile market, according to Jupiter’s Alistair Irvine.
As we approach the year end, 2015 is shaping up to be one of the tougher periods for investors in recent years with ramped up volatility and mostly flat returns outside of European and Japanese equity markets.
Source: FE Analytics
For multi-asset funds such as the popular Jupiter Merlin range of funds of funds this where diversification is supposed to kick in, whereby holding uncorrelated or lowly correlated assets helps to protect against the downside of market movements.
Here Alistair Irvine, product specialist on the Jupiter Merlin range, reveals what the team is looking to in the global macro picture to protect capital against in their portfolios.
China
Irvine says the Jupiter Merlin team are most concerned of a slowdown in global growth led by China and its implication for sentiment and, by extension returns, from equities.
“We have been relying on China globally as the ‘marginal consumer' for the world's commodities for much of the decade and when that supply and demand gets into imbalance it creates major problems,” he said.
“The main problem that the market has with China is that by and large it doesn't believe the numbers. For the first half of the year Chinese gross domestic product [GDP] was reported at 7 per cent.”
“However, other sources of data such as mobile numbers sales, commodities demand and imports from companies doing business with China told another story. Caterpillar, BASF - they were all telling you that is was hard to shift volume.”
According to FE Analytics, the Shenzhen Stock exchange index of domestic Chinese shares is back in positive territory for the year after a mighty crash of more than 45 per cent since June but the average IA China fund is still down for the year.
Performance of index in 2015
Source: FE Analytics
“China is trying to rebalance the economy more toward domestic consumption and less reliance on exports but it is something that is going to take a long time. However, China has been slowing for a decade. If anyone thinks it is going to go back to north of 10 per cent growth, they are dreaming,” Irvine added.
Oil
Next, he says the oil price looks set for only a modest pick up in price which provides a boon for many markets such as Japan, Europe and India who are large importers of oil.
The oil price has been falling since the middle of 2014 and despite a small recovery earlier in the year it has struggled to show any momentum in recovering above $50 per barrel. Today it sits around $45.
Irvine said: “The oil price has fallen 60 per cent from where it was in the middle of last year. We are still below $50 per barrel. We know the catalyst for that on the demand side is the slowdown in China.”
Performance of index since June 2014
Source: FE Analytics
“Oil is not obeying the normal rules of traditional supply and demand. Oil is not just about the demand side it is also about the supply. There are complicated factors on the supply side.”
He says supply is not being reduced because of instability amongst oil producing countries such as Venezuela, Russia, Nigeria and Brazil but that there should be some recovery over them medium term.
“Our best 'guesstimate' is somewhere between $50-80, but who knows against this background.”
Diverging paths for interest rates
Last up, Irvine says the team are mindful that there is a divergence in monetary policy by central banks in different areas of the world in the face of broadly slowing global growth from 3.4 per cent in 2014 to a ‘consensus forecast’ below 3 per cent this year.
He points out that while the US and UK are likely to raise rates sooner rather than later, it is a very different story elsewhere in the world.
“[There are] places where rates are likely to remain stable, this is Japan and the eurozone. Then there is the rest of the world where rates are broadly falling. This includes places like India and China.”
“You still have some developed economies which are making progress. There are inflationary pressures in the labour market that will determine when rates will go up.”
“In Europe and Japan, growth is there but is not particularly strong. There is some consideration that the 'quantum’ of quantitative easing will be increased or extended or even by bringing down rates even further. Or combination of all three.”
The £572m Jupiter Merlin Worldwide Portfolio has the largest weightings to Japan and Europe with a respective 12.30 per cent and 22.86 although all five portfolios are overweight these markets.
All funds also have their largest positions in either the UK or US markets however, Irvine says the Jupiter Merlin team are concerned that the Fed and the Bank of England maybe caught into putting up rates too late to deal with latent inflation.
The $8.7bn Findlay Park American fund, which is headed by James Findlay, is the largest position in Jupiter Merlin Balanced Portfolio (11.2 per cent) and Jupiter Merlin Growth Portfolio (19.12 per cent) and Jupiter Merlin Worldwide Portfolio (26.2 per cent).
He added: “These central banks are going into the next fight with one hand behind tied their backs. That is not a clever place to be. We are agnostic as to when rates will go up…but there is a risk that the Federal Reserve might 'miss the bus'.”