Update from Momentum Global Investment Management

In response to the recent very bearish article from RBS please see the below comments from Glyn Owen; Investment Director at Momentum Global Investment Management:

‘The recent RBS article has received quite a lot of attention; just a pity they didn’t get bearish in April/May last year, since when many markets have fallen close to 20%! There are lots of ultra bearish notes being written at the moment, but I find that nearly all of them are telling us what has just happened, not what is going to happen over the next year.

We all know that China is in a bit of a mess, has a credit problem and the economy is no longer growing rapidly (10% +) and never again will; that the oil price has fallen and the commodity markets have collapsed (it has been happening for about 4 years); and that emerging markets have a lot of problems, including too much debt, they have also been falling for 4 years. The big question is whether these quite evident problems will spill over into the developed world, and I think therein lies the single biggest risk to markets this year. I agree with RBS that the debt problem is worrying, but it is predominantly a developing world concern. Clearly the developed world is suffering some negative pulses especially in terms of growth from the emerging world but it is extremely unlikely that financial/over-leverage problems in the emerging world cause a global systemic crisis financially. Few banks in the developed world have large exposures to the emerging world, and it is no coincidence that truly cataclysmic global events have flowed from the developed world into the emerging world, not the other way round. Yes, we had the Mexican, Asian, Russian crises, and these knocked the developed world temporarily but in each case there was no lasting damage and recovery came quickly. The real damage was in the emerging countries themselves. In contrast the GFC started in the developed world and spread global contagion rapidly as it caused a systemic crisis in the global financial system (i.e. major banks of global importance went bust, taking the system with them).

I recognise that emerging countries are now much larger in aggregate and account for 40% of global GDP, so will have a greater impact on the developed world than historically, and I am not underestimating the damage caused by the malaise across most of the emerging world, nor the excessive debt issues. I can see these continuing to have a negative impact on global markets through this year, with periodic bouts of extreme nervousness, just as we have seen so far this year and at stages last year. But the impact on the developed world needs to be kept into perspective, it is highly unlikely to be big enough to derail the modest recoveries underway, and if anything it will extend the long cycle we are in: which central bank will tighten policy with all these negative pulses and uncertainties? Perhaps it means it really is ‘one and done’ for the Fed: I think not but I do think that the Fed will be even more cautious in raising rates.

The other issues to bear in mind are a) markets have fallen a lot and so are discounting a lot of the negatives; b) there have been huge negative forces coming from the collapse in oil and metals – the slashing of capex has knocked close to 1% off global GDP in the past couple of years and so far we have not seen the offsetting impact of lower oil prices feeding into consumer spending (I think we will see this factor beginning to add to growth this year); c) most of the falls in commodity markets are behind us: of course they could fall further and in percentage terms it could be quite a lot but in absolute terms we can be certain that the bear market has run most of its course (oil has dropped $80 per barrel in the past 18 months, it can only fall $30 from here!); valuations across many asset classes have improved materially – despite a very tough earnings environment for the corporate sector there is still likely to be some, albeit modest, growth this year.

In sum, I agree that the risks to the global economy and markets are at the highest levels since the GFC and since this bull market started in 2009 but I don’t believe we are at the early stage of a deep and prolonged bear market. I do not see the conditions that would result in a very sharp tightening of monetary policy across the developed world, so interest rates are likely to remain very low for some time to come. We are in a very subdued growth era and face tough conditions for corporates but we are not looking at recession and big falls in earnings anywhere in the developed world (outside commodity sectors); instead we face an extended cycle with most countries and banks able to withstand the downturn in the credit cycle which we are seeing across the emerging world.

My message is therefore to stay invested; a widespread chorus of cataclysm is never a good time to sell and usually calls at the very least a short term bottom in markets, and it seems to me that we have some time to go in this cycle. With global developed equity markets back to where they were in late 2013 we are seeing some much improved valuation opportunities today so some buying at these levels makes sense, as long as the volatility to be expected can be tolerated. Perhaps only when all the obvious worries that we face disappear and everyone becomes bullish should we become more cautious, and that seems some way off today.’

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