Cazenove’s Le Jehan: A Damp Squib?

Joe Le Jehan 200

Digesting the swathe of policy announcements around the world and having spent a few days in Asia over the last month, it’s been intriguing to gauge investors’ state of mind as we head towards the end of the year. A repeat of the pattern of previous years would see policy action induce a fourth quarter rally across most asset classes and a wave of near term optimism in investors. But a look at the last month may point to a different outcome this year, begging the question will Q4 be a relative damp squib for investors?

Market reaction to both Mario Draghi’s ‘the euro cannot fail’ moment and Ben Bernanke’s ‘QE infinity’ announcement felt remarkably like the old adage, “buy the rumour, sell the fact.” With both European & US equity markets now lower and most other markets hovering at similar levels than a month ago, investors do not yet appear to have fully embraced the latest in a long line of policy acronyms as meaningful drivers of growth in various regions.

But, as a number of fund managers we’ve spoken to in the recent past have highlighted, these latest policies in the eurozone and the US do at least offer a near term backstop to sentiment and markets. Indeed, the ‘open-ended’ nature of recent initiatives may yet remove the ‘fat tail risk’ of a disastrous outcome in either.

Perhaps part of the muted reaction is a more widespread acknowledgment of the broader global growth problems. Spending some time in Hong Kong and China at the end of last month, it was noticeable how sanguine many fund managers in the region have become. The optimistic belief that Asia can continue to drive global growth no longer seems to be the default position that it once felt when chatting to those on the ground in the region. There appears an increasing uncertainty about what was once assumed to be a relatively smooth Chinese political handover and, noticeably, a greater appreciation of the difficulty in shifting China’s growth drivers from industrialisation to consumerism. All of which seem to give greater credence to the fears that China may yet experience a harder landing than many have previously envisaged. Which, in turn, may have knock on effects for many of the more globally exposed companies across the Western world.

The last eighteen months have been characterised by a desire for certainty in an uncertain world, so it’s unsurprising that European and latterly Chinese markets have lagged as investors have positioned themselves with safety firmly in mind. But, whilst the travels of the last month have done little to dispel our belief that China faces a more muted outlook, the potential backstop of both US and Eurozone policy does open up the possibility for investors to become more progressive in positioning in the coming months. Of course, there are near term hurdles – not least the US elections; the fiscal cliff and the unnerving wait for Spain to ask for help – all of which will weigh down on sentiment for now. But, whilst the fourth quarter may prove a damp squib in relation to previous years, with these issues put to bed, the new year may yet hint at a degree of certainty markets crave.
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Joe Le Jéhan is an analyst at Cazenove Capital