Is global market turmoil just a volatility event?

The current market turmoil is “just a volatility event” and investors should not ignore the positive fundamentals still coming from developed markets, experts argue.

On Monday, global equity markets slumped as the rout in domestic Chinese equities continued, mounting fears that the world’s second-largest economy could slow down much more quickly than had previously been thought, potentially dragging down other economies with it.

JP Morgan Asset Management European Equity Group managing director and portfolio manager Stephen Macklow is not discouraged by the fall in the markets led by China, claiming it is “just a volatility event” and that global economic fundamentals “haven’t really changed”.

He says: “It is very clear emerging markets are under pressure. One of the things that we do know is although you get short term volatility and the market starts to trend very sharply in one direction, we don’t think fundamentals have changed. 

“You’ve got the eurozone, which continues on its recovery. In the US, the Fed made it clear that recovery is on track and expects inflation to get back on target. In the UK unemployment figures also look good as well as the manufacturing figures for Germany, which exceeded expectations.”

About 4 per cent of eurozone exports go to China but around 7 per cent go to the US, explains Macklow, so although there is pressure from Asia Pacific “there is a counter balancing improvement elsewhere”.

F&C’s multi-manager team, co-headed by Gary Potter and Rob Burdett, also says the slowdown in emerging markets will have an impact on exporters and commodities stocks, but those low commodity prices will continue to be a tailwind for Japan and Europe.

The firm says: “The deflationary forces of lower commodity prices will also allow developed markets’ central banks to keep interest rates lower for longer and this volatility has greatly reduced the chances of the US Federal Reserve raising interest rates next month.

“Global growth will obviously be impacted by a slowing China and emerging markets, but unless growth collapses, some markets may well have over-sold in the short term, with the caveat that they may fall further yet.”

Aviva Investors head of multi-asset Peter Fitzgerald also doesn’t think the recent events are a warning of a significant global downturn or recession.

He says: “We have added to equity positions in continental Europe, Japan and the US in recent days, and view any further bouts of extreme volatility as an opportunity to add exposure to these regions. We continue to prefer prospects for developed markets over emerging markets and have no commodity exposure.” 

On the other hand, Macklow hasn’t made any changes to his portfolio, trusting in companies’ valuations which he believes remain attractive.

He says: “We looked at valuations and improvements in earnings. The valuations got more attractive and nothing really changed in improvements in earnings.

“In our portfolio we are more focused on domestic earnings and these are still holding really well and that is consistent with the picture we are getting from credit, money supply and PMI.”

He concludes: “The one thing that surprises me is the fall in the US dollar, which is very contrary to expectations. This happened maybe because the dollar has been too strong causing US companies to hold their earnings back earlier this year.

“However, the Fed has been very clear about the fact that the monetary policy tightening process will be gradual and will probably finish at a lower interest rate that they finished in the past, but nevertheless if you get increasing interest rates in the US that should be a support to the dollar.”