Inflation subsiding, rate cuts and strong corporate earnings mean stocks should still be the place to be in the last part of this year, according to Tom Becket, co-chief investment officer at Canaccord Genuity.
Much has been made in recent weeks of the market volatility at the start of August, something that many put down to an unwinding of the yen carry trade, which involved borrowing yen to invest in higher-yielding currencies and other assets.
Becket said the sudden drop in equity markets on 5 August was also triggered by a combination of other factors including growing concerns over the outlook for US and global economic growth, worries that central banks are cutting interest rates too late, and fears that a souring economic environment could lead to lower corporate profits and a rise in insolvencies.
This is on top of other issues, such as multiple elections taking place this year. Indeed, how politics will shape markets was “the most frequently asked question from our clients”, he noted.
“Uncertainty over how the new Labour government will balance its spending plans with any rise in tax is front-and-centre in the minds of our clients – as well as those of our international creditors, who we rely on to keep financing our government’s spending,” he said.
“We believe that this will create nervousness in parts of the government bond market, particularly with longer-maturity bonds, but should not detract from a positive outlook for attractively valued UK equities or corporate bonds.”
Looking elsewhere, political chaos and the subsequent “gridlock” in France following the second round of its election has added volatility, while the US vote – with vice president Kamala Harris now on the docket following president Joe Biden’s withdrawal – should “add to recent market oscillations and will continue to do so heading into November’s election,” he said.
However, Becket thinks that investors would be better served by focusing on five key themes, away from the noise of politics.
The first is the global economy, which he thinks will continue to grow at a “solid, but unspectacular pace”.
“A recession is possible, but it is unlikely to be imminent. We expected the recent slowdown in the US economy, but remain of the view that the outlook is broadly satisfactory – even if risks are rising,” Becket added.
Next is the double whammy of inflation falling – something that should continue as pressures subside, although perhaps not at the pace some would like – and falling interest rates, as we have already seen in the UK and Europe, with the US Federal Reserve expected to follow suit in September.
Indeed, this was all but reaffirmed by chair Jerome Powell on Friday, when he spoke at the Jackson Hole Symposium. “The time has come for policy to adjust”, he said, giving investors the clearest sign yet the Fed is ready to move next month.
In turn, bond markets should be supported by lower rates, with Becket describing yields as “sensible” at present, while they should “prevent major issues in equity markets, where valuations are broadly fair”.
“We also expect growth in corporate profits, as shown in the ongoing corporate results season,” he added.
Lastly, the co-CIO said a “major factor” in the latest bout of volatility has been because markets have performed well this year and investor sentiment has become “too complacent in some places”.
However, he noted that this was “probably not sufficient enough to lead to a major market drawdown in the coming months”.
Overall, therefore, the picture appears rosy. If a global recession is avoided, inflation “plays ball”, interest rates are lowered, and companies grow their profits, there are “reasons to expect positive progress”.
Even if it does not quite go to plan as stated above, “there is evidence that the most important lesson for investors currently is to ignore the ‘noise’ and focus on the quality of the assets you’re buying, the price you’re paying and be patient,” he concluded.