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Schroders Alan Brown

Comment: Concerns remain over world growth and Eurozone stability


Schroders’ Chief Investment Officer, Alan Brown comments on Friday’s market volatility…

Two items of news lie behind the continuing market rout: the sharp decline in the Philadelphia Index and the news that other Eurozone countries were likely to seek to negotiate collateral arrangements from Greece to match the deal that Finland has achieved. As such this is a continuation of the same two themes, concern over the prospects for world growth and concerns over the stability of the Eurozone.

As often happens at times of great uncertainty, natural value buyers will often sit on the side lines rather than try to catch the proverbial "falling knife". Thin August markets compound the problem. Meanwhile, more favourable news, such as the July industrial production numbers, are being ignored.

In this kind of environment forced selling from leveraged investors and capital protection strategies can find no buyers leading to exaggerated price declines. While the risks of double dip have clearly risen and there is a danger that the market could create its own reality by hurting confidence, we expect that growth will continue, albeit at an anaemic level.

The developments in the Eurozone do continue to be disturbing. The political resolve to continue supporting the peripheral countries is clearly under pressure. Moves by a growing number of countries to demand collateral threatens to undermine the entire bail out package.

And so the flight to the "safe havens" of government bonds and gold continues with US 10 year yields challenging the 2% level and Gold shooting up to USD1,880. With both government bond yields and equity markets falling, the relative valuation of equities versus bonds is reaching extremes. Much bad news is already in the price.

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