By: Jason Stather-Lodge
Jason Sather-Lodge, CEO of OCM Wealth and Asset Management remains convinced that investors would do well to hold overweight positions in equities especially Europe, Japan and India, staying steer clear of government bonds in US and UK in an environment of potentially rising interest rates in those regions.
As I write the devaluation of the Yuan (Chinese currency) in China is having a negative impact on equity index prices. A devaluation is good for China exports as they will become cheaper but negative for exporters to China. On the plus side, we are starting to see the Peoples Bank of China (PBOC) effect changes that will be stimulating for the region after a series of interest rate cuts that were largely ineffective. What happens next though is what causes opinion to differ in that this will start a currency war in the region and further interest rate cuts in many other countries in the region to try and maintain competiveness.
Away from China, equity momentum was positive in Europe last week as the Greek issue continued to be a non-issue. In the US, investors remained focused on Federal Reserve policy as US Economic data continues to be mixed, but suggest that Federal Reserve action should occur sooner rather than later. Today’s news though as regards to the Yuan being devalued may give the Fed reason to defer a rate rise and remain cautious against the backdrop of uncertainty in how far the Chinese will go to support their economy and devalue the currency.
When the Fed finally acts, we think rising rates will put pressure on bonds, however for as long as rates rise gradually, equities should be able to push higher until of course you reach the tipping point when the economy slows down too much and we enter a recessionary phase again. There is absolutely no doubt in anyone’s mind that the US is prepared to raise rates and when they do it any further rate rises will be slow and sympathetic to the wider global economic conditions.
U.S. equity markets were last week dominated by a sharp sell-off in media stocks and continued weakness from Apple and the biotechnology sector. Commodity prices also experienced ongoing declines with US equities finishing the week lower, with the S&P 500 Index falling and all other major indices rising. All of the European markets provided positive returns as we saw a slight devaluation in the Euro against Sterling and a rally in the underlying assets. This morning (11 August) we have seen a Greek deal that will push the Greece issue off the table for at least another 18 months. Overall we maintain our position that the assets we hold and our asset allocation is well placed to provide a strong contribution over the coming 6 to 12 months as long as we do not get further geo political issues.
Our macroeconomic thesis remains unaltered and we continue to watch China, expecting what is happening there to continue to dominate the theme for some weeks yet. A number of risks could transpire to end the global equity bull market We feel those risks emanate from China, due to the growth expectation being lower than forecast in the region . This could have a knock on effect on mega-cap forward earnings expectations resulting in an equity pullback. Continuing that theme, global trade is not as strong as it could be, and many countries are facing mounting debt pressures, and at the same time investors need to be on the lookout for the possibility of a sharp rise in bond yields.
Nevertheless, the global economy has been resilient to many shocks over the last few years, and we believe the economy is strengthening. In the U.S, we think the weakness we saw in the first quarter will prove to be an anomaly and signs point toward an acceleration in economic growth as is the case in the UK and in Europe. That additional growth in more developed markets may offset some of the slowing consumer demand in emerging markets.
Going forward though, volatility may rise and the pace of gains is unlikely to match what we have seen in recent years. However, we remain convinced that investors would do well to hold overweight positions in equities especially Europe, Japan and India, staying steer clear of government bonds in US and UK in an environment of potentially rising interest rates in those regions.