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Fundamentals vs Fear: 7IM Market Commentary

Posted Friday, 12 February 2016, 2.57pm

“If we expected a global recession, our portfolios would look very different; we don’t.”

 

"Investors face some critical questions as markets remain stuck in a cycle of volatility and pessimism. We must consider whether we are going into a deep global recession that will drag corporate profits lower (and might justify current asset prices), or not? We must weigh the appeal of the short-term safety of cash, against the longer-term certainty that cash will not help us meet our goals – where only riskier assets can offer the possibility of sufficient investment returns. And we must weigh the appeal of assets that have already fallen a long way, and look cheap, against the possibility that they might – perhaps irrationally – stay volatile and become cheaper still.

Many investors are succumbing to a market narrative that regards cheap oil prices as a sign of weak global demand. That suggests a spillover from cuts in jobs and Capital Expenditure (CAPEX) in the energy sector to cause a recession in the broader economy, and that sees impending debt defaults by energy companies as another 2008-style system-wide credit crunch. Under this scenario, the Federal Reserve (Fed) modest interest rate hike in December might be regarded as a policy error. And adding bite to this pessimistic narrative is a perception both that China’s manufacturing slowdown reflects an economy grinding to a halt and that China faces uncontrollable capital flight..."

Alex Scott, Seven Investment Management (7IM) Deputy Chief Investment Officer

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