Written by: George Prior
‘Sit still for now’ is the message for investors amid a global market sell-off from a senior analyst at one of the world’s largest independent financial advisory organizations.
deVere Group’s International Investment Strategist, Tom Elliott’s warning comes as markets in Asia joined the major sell-off after a bruising session on Wall Street on Wednesday which saw two of the three main indices wipe out their gains for the year.
Mr Elliott comments: “Global stock markets are currently in a nervous mood. Despite reasonably strong economic and corporate earnings growth at present, there is a growing suspicion amongst investors that the best days of the current economic cycle are behind us.
“Unsurprisingly, then risk is out of fashion. Hence the sharp declines we have seen in risk asset classes such as stock markets, while defensive assets such as U.S. Treasuries are in demand.”
What’s caused this?
The U.S. Federal Reserve has recently made clear its determination “to continue raising interest rates to levels that, some analysts believe, risk choking off growth altogether,” observes Mr Elliott.
Why is the Fed being so aggressive, when U.S. inflation remains modest?
He notes: “The central bank is trying to ‘normalize’ its monetary policy. This means bringing interest rates back to pre-global financial crisis levels, and shrinking its balance sheet back to pre-crisis levels by destroying $40bn a month.”
Meanwhile, economic and corporate data that focuses on recent and current conditions may be healthy, but forward-looking growth and profits forecasts have been reduced lately.
Mr Elliott continues: “The U.S. economy grew at an impressive annualised rate of 4.2% in the second quarter. This has helped the Fed justify its interest rate hikes. But many economists have warned that this rate of growth is unsustainable, with much of it coming from the one-off boost to corporate and household demand that Trump’s tax cuts provided.
“Meanwhile tariffs threaten to reduce demand growth in those countries that apply them, including the U.S., as consumers have to pay more for imports and have less money to spend on other goods.
“The Fed’s rate hikes, and liquidity destruction, is pushing up dollar borrowing costs and will suppress demand.”
He goes on to add: “Turning to the world’s second-largest economy, China, economic growth is supported by dangerously high levels of borrowing by the household, corporate and municipal sectors.
“Despite Beijing’s attempts to curb the growth in debt, when the economy slows its first response is often to relax bank lending standards in order to boost the economy. The debt problem, and with it the risk of bad lending decisions, becomes a little bigger.
“Investors fear that this cannot continue indefinitely, and that China is vulnerable to a credit crisis.
Perhaps unsurprisingly, the IMF and the OECD have both downgraded their 2018 and 2019 global growth forecasts in recent weeks.
“In addition, we have seen some cautious trading outlook comments from bellwether U.S. companies and market analysts have taken note, and are revising downward corporate earnings growth forecasts,” he adds.
The deVere International Investment Strategist concludes: “For investors the combination of a downgrading of global corporate earnings growth, and rising U.S. interest rates, favours dollar cash and the U.S. Treasury market over growth-sensitive stocks. Hence the recent falls on global stock markets, and the slight rally in Treasury yields, in recent weeks.Historic Bull Run Will Continue, but Prepare for Market Sell-Off
“Over the coming weeks investors will be looking to the Fed for a response to the recent stock market sell-off.
“Investors are advised to sit still. Assuming that they are invested across the range of financial assets, from defensive government bonds to riskier growth-orientated stocks, and that they have a long-term investment horizon, a ‘do nothing’ approach during spells of volatility is shown by financial history to be the best approach.
“Selling risk assets now, hoping to buy back those assets at cheaper prices in the future, too often proves to be profitable only for stock brokers. Market timing is harder than it looks.”
Last week, the deVere Group founder and CEO, Nigel Green, noted: “A well-diversified portfolio and a good fund manager will help investors capitalize on the opportunities that volatility brings and sidestep potential risks.”