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What is the outlook for global equities considering the turmoil in China?
“It has been a tough week for markets and a very difficult start to the year, the worst since 1928. But if you look at long term equity valuations they look reasonable in the context of history.”
“However, I do think that masks something of a bifurcation in markets and I think the value opportunities are in the more cyclical and economically sensitive areas of the market.”
“I’d highlight banks – US banks in particular – and some areas of the energy market are definitely looking much more interesting now along with select areas of emerging market exposure.”
“I think the outlook is reasonable but I think markets at an aggregate level will struggle to make too much headway but the interesting thing here is the dynamics within a market.”
Is the rout over?
“It is a very difficult to say and, you know, at Invesco Perpetual we take a pretty long term view. What I would focus on is some of the areas where valuations are starting to become much more interesting and where we are really seeing value emerging.”
“But I would say that momentum can certainly push things further than one may assume to be rational in the short term, but certainly over the medium term we see big opportunities coming out of this.”
Could the oil price be set to rise this year?
“This year could be very, very interesting from the perspective of the oil price and looking back over the past couple of years you have had quite significant supply increases coming on, particularly in some other parts of the world.”
“That has taken the oil market from a point of slight undersupply to a fairly small oversupply of around 2 million barrels per day from a total market size of 94 million barrels per day. It is not that significant.”
“Actually, non-OPEC supply is rolling off by around half a million barrels per day and demand is picking up at around 1-1.5 million barrels per day. So what is only a 2 million barrels per day oversupply, by the end of next year could look more like a balanced market.”
“In the short term this has meant that the supply and demand curves of oil are quite steep. Therefore the reaction to a fall in price in terms of either hugely increased demand or very significant falls in production, doesn’t happen in the short term.”
“Bu it will happen over the medium term, we have seen very significant capital expenditure reductions from the big oil companies and global decline rates will pick up. So I think the oil price will move to a point of balance of the next 12 to 18 months and I think that could have really profound implications, not just for the oil price but also for inflation and what that mean for bond yields as well.”
Would you say you’re relatively bullish at the moment on the global stock market?
“Relative to consensus, I do feel slightly more optimistic. It feels to me that consensus in convinced that there is a very pervasive deflationary force in the world. Clearly what has been going on over the last five years post the banking crisis has been quite a deflationary force and I totally accept that.”
“But I do believe that we are starting to see signs of increasing credit growth in the US with the banks lending again. The core inflation numbers are actually reasonably firm and around target 2-2.5 per cent in the US.”
What would you say are the two or three biggest risks to markets in 2016
“One of the key risks we need to be careful of next year is the return of inflation. I’m not saying I am necessarily an inflation hawk and it is going to 4-5 per cent but in a fixed income market that is pricing less than the Fed expects in terms of rate hikes, US job data continues to be very strong.”
“The most recent jobs data looks very strong in the US and wage inflation looks to become more pervasive in the US and some of those core numbers will start to look quite different.”