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Nancy Curtin, Close Brothers

The ‘growth’ scare virus


Nancy Curtin, (pictured) Chief Investment Officer, Close Brothers Asset Management, reacts to recent market movements…  

While the list of concerns has no doubt broadened and deepened over the last few days, we view these moves as a market correction, and not the end of the bull market that began in March of 2009. Markets during the summer usually exhibit higher volatility and the correction may be exacerbated by thin summer volumes and selling pressure from leveraged and index momentum players. Moreover, this is not the first major correction of more than 10 per cent that we have seen since this bull market began: the S&P 500 has twice fallen over 10 per cent, the MSCI World YTD Decline from high Decline since Yuan Devaluation Equities Japan four times and the FTSE 100 six times. In all occasions, equity prices rebounded and the bull market continued.
From a growth perspective, we still think the fragile and tepid recoveries in the developed world are likely to be sustained and recent market weakness could be met with some form of policy support. Economic growth is clearly lower than expected globally as the deterioration in China has hampered the Eurozone recovery. However, the US continues to soldier on and expectations are that the second quarter revision (later this week) could come in even higher than expectations. Meanwhile, policy makers may attempt some form of concerted policy support. It will be very interesting to hear what is being said at Jackson Hole at the annual economic symposium later this week. A Fed hike in September garners a lower probability than one month ago.
From a strategy perspective, whilst we remain slightly overweight in equities versus bonds, our strategy has been and remains a focus on shares which have no significant exposure to China manufacturing and emerging markets resource demand. We are underweighted in any commodity shares or commodity countries. We have also increased cash recently and had reduced further our Asian largely ‘consumer’ equity exposure.
We think security selection has never been more important and we continue to focus on those businesses combining a high level of quality, value and growth that should continue to perform resiliently in the current environment. This has led us to be weighted in more domestically focused shares in the US and UK and select health care, technology and consumer discretionary names in the developed world, most of which had quite pleasing 2nd quarter results.

The real long term danger is that global growth continues to slow, pushing western economies into another recession at a time that monetary authorities have less left in their policy toolbox. With near zero rates and QE already in place in most major economies, a negative growth shock is the last thing central bankers need right now. We will continue to monitor this risk.
However, while for now markets do not feel good, and could well head lower, we think that the magnitude of the moves, particularly in many developed market shares with little to no direct exposure to China, resource and EM factors, do not seem justified by fundamentals. We also believe it would not take much by way of policy response to see a sharp rebound and hence we are reluctant to reduce risk further in quality shares and businesses which seem completely unconnected to the malaise. Finally while bonds and cash offer save haven status in such an uncertain world, they do not offer much by way of value and upside in our view from current levels. Hence, for now, we will maintain our highly focused strategy to be over-weighted in businesses and shares which we believe offer exposure to long term growth and dividend income support for clients

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