The two big corrections markets have experienced recently mean that now is a great time to find buying opportunities, according to Trevor Greetham (pictured). 
The head of multi asset at Royal London Asset Management says that the panic experienced in markets in August last year and earlier this month have been the strongest levels of negative sentiment that have been witnessed since 2011’s euro crisis and the Lehman Brothers-induced crash in 2008 and says that, like these two periods, now is a time to add to holdings rather than sell.
Markets have been in turmoil over the last 12 months or so as a result of China’s growth slowdown and the collapse in commodity prices. While many investors are bearish at the moment, others believe that this market performance is incongruous with macroeconomic data.
Performance of indices over 1yr
Source: FE Analytics
“Lead indicators that don’t include stock prices look as though things are picking up a bit,” Greetham said.
“But so far we’ve had the stock markets worry about a slowdown in global growth to the extent that we’ve entered another one of these panic environments.”
As such, the manager talks through the concerns weighing heavily on market performance and why market concerns are both exaggerated and misguided.
China
Known as the engine of emerging markets, China’s growth slowdown following years of rapid economic growth has shaken investors.
Performance of index over 1yr
Source: FE Analytics
The world’s second-largest economy is responsible for a significant amount of trade and debt globally and the suggestion that its economy’s health is dwindling and has created panic worldwide.
“China is pursuing global deflation. It’s been slowing down for three or four years pushing commodity prices lower, and as a result you’ve had global disinflation. Also, they’ve recently been devaluing their currency slightly and that’s added to that global disinflation pressure,” Greetham said.
The manager points out that the degree to which China has devalued its currency is very modest and says that it has been moving around in between the 4 and 5 per cent range, which is historically low given that it has depreciated by 40 per cent versus the yen and the euro in the past.
“It’s not a dramatic move and when we look at the Chinese data we don’t think it’s as bad as people have been saying,” he argued.
“There’s been no evidence in a collapse in Chinese economic activity. It’s continuing to slow and if anything it’s pacing out a little bit.”
A US recession
A number of investors have been concerned that US is teetering on the brink of a recession given that home ownership has plummeted to a 50-year low and the lower oil price hasn’t fed through into consumer spending power, in addition to a number of negative economic indicators.
This, combined with the fact that investors are expecting further rate hikes from the Federal Reserve, has led to the belief that the US economy could falter under the pressure.
“Jobless claims rise sharply in a recession and there’s no sign of this happening, so although we’ve had a weak quarter in growth in the US, the labour market data keeps coming in strong and it’s the best indicator of how strong the underlying economy is,” Greetham said. “This is also why the Fed is likely to continue raising interest rates.”
The manager says that the use of forward guidance by central banks – the concept of using longer term forecasts to influence spending decisions – can be hugely damaging to investor sentiment and should be scrapped in today’s environment.
“I think forward guidance was a useful thing when people were worried that central banks can’t get out of a hole,” he continued.
“If you say to people you’re going to cut rates and print money until things get going that’s reassuring and not a bad thing to do in an extreme situation. If you say you’re going to hike rates four times this year, every time you hit a bad bit of economic data people say, ‘and there are going to be four more rate hikes.’”
“It’s unconstructive. It’s not doing anything at all. I think you’ll see this forward guidance gradually go away and central banks will end up saying what they’re doing now and not next week. I think that’s a better way to be. The US isn’t in a recession.”
Oil
While Greetham admits the plummeting oil price is bad for oil-producing companies and the capital expenditure (capex) for providers that service them, he says that it is positive for consumers even if the data hasn’t come through yet.
Using the below chart dating back to 1970, Greetham points out that US consumer spending in purple is growing at a steady 3 per cent.
The orange line, which is the inverted oil price pushed forwards by a year to remove the impact of inflation movements, shows that when oil price increases a recession often follows.
Performance of oil price vs US consumer spending
Source: RLAM
“Most people blame recessions on banks, but this chart suggests oil price has a lot to do with it as well,” he pointed out. “There was a massive surge in oil price in 2007 mainly because China was adopting US monetary policy through their currency peg and when the US slashed interest rates and the dollar weakened, it supercharged China and the oil price shot up. That was a big reason for the recession that followed.”
“But at the moment it’s the other way round and we ought to see spending and growth accelerate. I strongly believe we will see that this year.”
Banks
The significant underperformance of banks in 2016 has also unnerved investors recently, given that in many cases banks are at new all-time lows relative to historical performance.
Performance of indices in 2016
Source: FE Analytics
Greetham says that one of the reasons for this is the move to negative interest rates in Europe and Japan, which has caused concerns that banks won’t make as much money by borrowing short and lending long, meaning their net interest margin decreases. In turn, this has sparked the belief that negative interest rate policy won’t be beneficial to the general economy.
“The central banks are not there to help shareholders in banks, they’re there to cut the cost of borrowing for the broader economy and to increase credit,” he said.
“The banks are quite keen to lend according to most of the lending surveys in the US and Europe for example. If interest rates are more and more supressed by these negative interest rates in the short term by central banks, that reduces the cost of borrowing for the real economy and that’s a positive.”
“I do think banks can create extra stimulus by moving interest rates negative and more negative. We think Japan will move to more negative next month.”
While Greetham says this isn’t necessarily good for bank shareholders, he says that the primary aim of central banks is not to help individual investors but to benefit the economy.
“As long as we don’t enter into a systemic crisis where banks can’t get the capital and don’t lend, I think we’re okay and I think we will see further stimulus,” he added.
Trevor Greetham has run the Royal London Cautious Managed fund since June 2015, but has managed a vast number of portfolios for Fidelity in the past since he joined in 2006.
Over this time frame, he has outperformed his peer group composite by 11.23 per cent with a loss of 1.81 per cent.
Performance of Greetham vs peer group composite
Source: FE Analytics
