Stephen Message gives his outlook for the UK market in light of the recent global sell-off.
At the end of August, UK equity market was trading down for the ninth consecutive session.
What a difference a few months can make: earlier in spring this year the index finally hit new highs after 15 years of trying by going through the 7,000 level. The UK equity market was also initially buoyed by the surprise news of the election of a Conservative majority government in May.
So what has changed over the summer to cause such a dramatic shift in sentiment?
Aside from the summer months often being a tricky time for markets, continued uncertainty over a longer-term resolution to the Greek financial crisis, further weakening of the Chinese economy leading to sharp commodity price declines and the impending prospect of interest rises in the US has led investors to reappraise their outlook.
Furthermore, the Chinese government intervening in the local stock market in an attempt to support share prices, followed by a surprise announcement of devaluation in the domestic currency, has created additional concerns that a significant contributor to the global recovery is beginning to wane.
As investors, the question we have to ask ourselves is: “Following several years of strong gains for equity markets, is the recent weakness simply a correction leading to a longer-term buying opportunity or is it the beginning of something more sinister?”
For me, the recent weakness in markets can be attributed to a broader slowdown in the global economy, but importantly not a recession. What is true is a number of macroeconomic themes that have been evident and supportive of global growth in the past few years, namely low interest rates and a fast-growing, export-led Chinese economy, are beginning to change.
However, the economy is in the mid-to-later expansionary phase, which is typically accompanied by improving labour markets leading to growing levels of consumer spending and corporate investment. This will lead to further profits and dividend growth, which will ultimately be welcomed by markets.
Bull Points
- Oil price fall a welcome boost to consumer incomes
- Corporate balance sheets generally strong
Bear Points
- Weakening Chinese economy
- Possible negative reaction to interest rate rises in the US
Stephen Message is manager of the Old Mutual UK Equity Income fund
