Loose monetary policy is set to power a year-end rally, according to Royal London’s Trevor Greetham (pictured).
The manager, who runs the Royal London Cautious Managed multi-asset fund, believes that we are set to see a similar global economic situation to that of the 1990s, when he says there was a decade of falling unemployment and strong growth, but low inflation due to a collapse in commodity prices.
Performance of indices in 1990s
Source: FE Analytics
At the end of August this year, commodity prices dropped to their lowest level since 2008 due to an excess supply of oil, aluminium, iron ore and gold, which therefore exceeded consumer demand. 
Countries such as Brazil and Russia are commodities exporters and as such, emerging markets have had a torrid time since the start of the year, with the MSCI Emerging Markets index falling by 6.92 per cent year-to-date.
Many investors have been unnerved by the performance of emerging markets, and this came to a head on 24 August when a mass market sell-off attributed to China concerns was dubbed as ‘Black Monday’.
However, Greetham (pictured) believes that the sell-off has was partially a result of “pronounced seasonality” in stock markets throughout the year, in addition to depressed investor sentiment surrounding China.
According to data from Royal London stretching over more than 40 years, there is an average annual return of 9.9 per cent from global equities. Between May and September, which is the time frame that the St Leger Day adage spans across, an average of only 0.3 per cent annualised returns are made.
“Why is this? It’s hard to say, but my guess is that it’s to do with the seasonality of consumer spending. A lot of people spend a lot of money in the run up to Christmas and in the summer factories often shut down. Then the factories don’t have any orders, it’s becomes quiet, people don’t know where the economy is going and they don’t take a lot of risk,” he said.
“What we saw over the summer when China devalued its currency was a really dramatic sell-off, it was one of the 10 biggest monthly sell-offs in America for 40 years, and people immediately started panicking about what is going on in China.”
While investors began questioning whether the economy is imploding and when US interest rates were going to increase, Greetham saw the turbulence in the market as a unique buying opportunity.
The manager adds that similar patterns have been seen in the past, and that the Lehman bankruptcy of 2008 and the euro crisis in 2011 also presented the chance to buy into new holdings and add to existing ones.
Because of this sentiment, he is therefore seeing the level of unrest seen in the market this year as positive and says that the growth slowdown in China does indeed have a silver lining.
“China is the reason why commodity prices are falling, and weak commodity prices are the reason that inflation is low and low inflation means low interest rates, which means we are in the recovery section of our investment process,” he explained.
Manager’s investment clock process
Source: Royal London Asset Management
“Growth expectations for China keep on falling and economists think China will start growing at six and-a-half per cent. I think over the next five years that will drop to six, then from six to five and-a-half, then from five and-a-half to five, and eventually China will be growing at the same rate as other large developed economies.”
This China growth slowdown and emerging market equity weakness, according to Greetham, shares a direct link with commodity prices and, while this may be bad news for emerging markets, will provide a boost to developed economies.
Another ‘headwind’ in the market that the manager believes will actually be beneficial for investors is the impending rate hike from the Fed, which he says should lead to further dollar strength.
Again, while this is likely to have a negative impact on emerging markets as much of their debt is priced in US dollars, he believes that this is yet another reason to be bullish on developed market equities.
“Stocks tend to beat bonds when the US employment rate is allowed to drop - if inflation keeps falling because of China and commodity prices stay low, it allows America to run its economy hotter and to put up with lower unemployment rates,” Greetham said.
“It looks as though they’re going to start raising rates but you have to ask yourself whether the US wants employment rates to rise. Sometimes central banks want unemployment rates to rise because inflation is out of control, wages are spiralling higher, and they almost need recession to get inflation back on target.”
However, the manager adds that the US is nowhere near this situation currently, and so although he thinks rates will rise and this could negatively impact emerging markets, policy is likely to stay loose in the US which will be generally positive for stock markets.
Chiefly though, Greetham says that the reason he expects developed market growth to accelerate is the fall in oil price, which leads to spare cash for consumers in oil importing countries such as the UK, the UK, Europe and Japan.
As such, he believes that these markets won’t just see growth in spite of weakness in emerging markets, but rather because of weakness in emerging markets.
“It really emphasises a continued positive view on developed markets. We’re overweight equities in our multi-asset funds and we’re underweight government bonds. We like Japanese equities in particular as Japan does well when the dollar is strong - Japan imports commodities and exports consumer goods to America,” the manager explained.
The multi-asset team at Royal London are also positive on Europe where loose monetary policy is coming through, and it likes America for the strength of its economy.
On the other end of the scale, the team is underweight Emerging Markets, Asia Pacific and the UK, due to the FTSE 100’s exposure to resource companies.
Performance of manager vs peer group composite
Source: FE Analytics
Royal London Cautious Managed was launched in June this year, but Greetham has been managing multi-asset funds in the Investment Association universe since 2006. Over this time, he has returned 32.35 per cent, compared to his peer group composite’s return of 18.06 per cent.
