Investors could still see positive returns from markets in 2016 despite current worries of a global recession, according to David Kelly, chief global strategist at JP Morgan Asset Management.
So far 2016 is turning out to be the worst year for risk assets since 2008, when markets fell sharply on the eve of the financial crisis and even some ‘defensive’ portfolios were down 20 per cent.
Source: FE Analytics
However, several factors suggest markets could see a prolonged rebound in the next few months, says Kelly. For example, he points out the latest data for ongoing earnings per share of US stocks suggests profitability will be in good health when the headwinds of falling oil prices and a rising dollar begin to subside.
“In 2016, provided the dollar goes no higher and oil falls no lower, these issues should stop dragging on US profits altogether, allowing for a general rebound in earnings to mid-to-high single-digit growth,” Kelly said.
“If this transpires, then given still solid economic growth, low interest rates and cheaper-than-average valuations, the rest of 2016 should be a good deal more positive for US equities than their very negative start to the year.”
“This in turn could contribute to rebounds in other global equity markets and some increase in long-term interest rates, suggesting a more general ‘risk-on’ environment for 2016 as a whole.”
Kelly says one trend that will continue to affect sentiment is the falling oil price, which has accelerated in recent months. However, he points out the continuing decline in the US rig count – which is viewed as a proxy for activity in the oil industry – could mean supply will begin to slow down, providing some support to the price of the commodity.
Performance of oil price over 2yrs
Source: FE Analytics
However, countering this has been the lifting of sanctions against Iran, which should result in a momentous increase in oil exports from the country over the next few years.
“At just over $30 a barrel, oil is now priced below the long-term average cost of production for many deep-water projects and much of the ever-more-efficient US shale industry,” he continued.
“However, global oil inventories remain overwhelming, suggesting a still very slow recovery in prices.”
“Crucially, the evidence continues to suggest that low oil prices are due to excessive supply rather than insufficient demand and thus should be regarded as a tax cut for global consumers rather than a harbinger of economic weakness.”
Also, he says an absence of a global slowdown is evident in data that acts as proxy for consumption in the US economy and the housing market.
“Industry reports suggest a very solid mid-17 million unit number for light vehicle sales in January. This, combined with a potentially strong reading on consumer confidence, should underline the fundamental strength of the consumer sector.”
“In addition, reports this week on new home sales, pending home sales and home prices, should all confirm the relative strength of housing demand and, with very tight inventories, home-building should increase in the months ahead.”
“In short, despite market fears, there is no evidence of a sharp slowdown in US economic activity.”
Despite the gloom apparent in many markets, data from the Investment Association show global equity sectors have seen strong inflows over the past month. Terry Smith’s Fundsmith Equity and Jacob de Tusch-Lec’s Artemis Global Income both took in more than £100m over this time.
However, just like the biggest recipient of flows in the IA UK Equity Income sector – Neil Woodford’s CF Equity Income fund, which has taken in £300m of new cash since the start of 2016 – these funds are more defensively tilted than their peers.
Larry Hatheway, chief economist and head of multi-asset at GAM, also strikes a more optimistic tone and says a market bottom is likely to be found in the coming months as robust data from the US in particular combined with low valuations across global equity markets tempts investors back to risk assets.
“Global growth conditions – while recently disappointing relative to consensus expectations – are not deteriorating in a fashion consistent with the extent of market moves. The softest sectors, such as manufacturing, suggest a temporary lull, not outright recession,” he said.
“Services, US and European real consumer spending as well as US and UK employment are all expanding above trend – as is real disposable income in both the US and the eurozone. Final demand in advanced economies is underpinned by solid income formation.”
While data relating to China will continue to hinder sentiment for some time data from the US, UK, eurozone, and Japan will be supportive, he says.
“Ultimately, a bottom will probably have to be found by some combination of stability in macroeconomic data and a sense that markets are oversold.”
FE Alpha Manager Iain Stewart, who heads the £9.1bn Newton Real Return fund, is not so confident the US economy can lead global sentiment higher in due course, saying the US recovery is not robust.
“A manufacturing and industrial recession is already in place and profits and cash flows in companies are already down,” he explained.
“The Fed has created and sent signals to the economy to invest while simultaneously giving low hurdle rates to access that money. The result is all sorts of capacity in areas where it is not necessarily needed.”
“As to when and if there will be buying opportunities arising from the current correction, I believe risk assets will need to fall further. I am yet to see the major shift needed to put in place a structural change from defensive companies towards more cyclical names.”