Robert Farago, Head of Asset Allocation at Schroders Private Banking, argues that despite another month of weak economic data, increased market volatility and S&Ps downgrade of US government debt, there are still reasons to be positive:
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The Credit Suisse Risk Appetite Index is now in panic zone - This measure of investor confidence acts as a contrarian index, implying we could be close to a buying level. The clear buy signal is when it comes out of panic, not when it goes in - so we're not there yet.
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Spanish and Italian yields held relatively steady during the week when the stock markets fell sharply. It was encouraging to see this stability in the two markets at the epicentre of the crisis following the US debt ceiling wrangle. Support from the ECB has further improved the situation.
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Economic news is poor, but disappointment is abating - While economic news has been poor, the Citi Economic surprise index for the G10 economies has trended up for the last month. This means that while data has continued to come in below expectations, the degree of disappointment is less than it was a month ago. Historically, equities have outperformed bonds while this index is rising.
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Investors protected by positions in bonds and gold - While portfolios have suffered in the sell-off, positions in bonds and gold have provided some protection. Hedge funds are providing mixed returns but are not facing the liquidity crisis that led to forced selling in the financial crisis.
"Although poor economic data has led us to revise down our expectations for growth, we continue to look for a rebound in the second half. As long as we see recovery as the most likely outcome, we will be looking for a turn in our technical indicators for opportunities to increase exposure to equities in portfolios".
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