Carrington Investment Approach
INVESTMENT DIRECTOR, ERIC WOODWARD’S VIEWS ON CURRENT MARKET CONDITIONS

As a result of the Chinese Authorities intervening in the markets and also devaluing the currency markets have become very nervous. As a result growth from China is slowing more than anticipated, which if demand slows in a low growth environment will have a knock on effect.

This led to a large sell off on Monday which as usual got a lot of media coverage overnight. Prior to Monday the weakness had been seen mainly in oil and commodities.

We think this increase in volatility may take a few weeks to pass, whilst we await further indications as to whether this is likely to push back any rate rise in the US and the UK.

The question remains; is this the onset of a major market sell off or a rather savage correction? It is early days yet, but we think it is more likely a correction.

This market cycle, overshadowed as it has been by the global financial crisis, has been punctuated by ‘panic attacks’ caused by concerns about imminent recessions. These featured US ‘double dip’ fears, worries about euro-zone disintegration and a hard landing in China. While it is true that this recovery has been weaker and less synchronised than in previous cycles, the evidence suggests that economic conditions are improving in the developed world at a sufficient pace to offset the deceleration in the pace of growth in the emerging world, which has been impacted by the sharp decline in the Chinese growth rate. Recent data from the US, Europe and Japan clearly supports this view and even in China recent data, such as that pertaining to house prices and property transactions, actually points to stabilisation. The Peoples Bank of China has considerable scope to relax monetary policy further to mitigate downward pressure on economic activity in China, hence there is a danger that concerns about Chinese economic weakness have become exaggerated. Clearly negative psychology is driving markets right now.

Across the developed world, credit conditions continue to be loose and there are few signs of a credit crunch. In the past, credit crunches, as central banks tightened monetary policy to combat over-heating economies, typically caused recessions. These, in turn, caused forward earnings and price earnings to decline. Corrections tend to occur when price earnings ratios fall while forward earnings continue to move higher. Recent earnings dynamics in all the key developed market regions continue to show signs of improvement.

So, macro fundamentals remain supportive, valuations are reasonable to good and investor positioning, already defensive, suggests a bounce-back in prices.

This piece was written Tuesday morning (25 August 2015) with the Chinese market continuing to decline but a very healthy bounce seen in the UK and Europe. We expect to see the USA open higher later today.

So as ever we remain very watchful as events unfold and will reposition the funds if needed in light of further market action. This will take a little time to unfold but rest assured we are ready to respond whatever the final outcome of this latest period of uncertainty becomes.

If you have any questions or concerns regarding the above please do not hesitate to contact us.

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