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Beverly Chandler

EY interprets Eurozone volatility as correction not turmoil


The latest issue of EY’s Eurozone outlook finds Roy Stockell, EMEIA Wealth & Asset Management Leader writing that while some observers have interpreted the volatility and equity price declines seen over the summer as the first signs of a renewed crisis in global markets, the reality is much less dramatic. He says: “What’s happening is more a process of correction and rebalancing than a slide back towards 2008-style turmoil.” 

China’s volatility may have featured in all the global headlines, but Stockell reports that China’s markets are still ahead of where they were at the start of the year. “And the devaluation of its currency was something China had wanted to do for some time, with the falls in stock prices providing the opportunity for the move, rather than being the root cause.”
Turning to Europe, Stockell believes that the correction in European markets is exactly that, and writes that a correction was overdue. “Going forward, continuing low interest rates in the Eurozone are likely to see an ongoing move from cash, back into the markets in search of returns, reflecting a growing awareness that leaving assets in cash is not the route to long-term wealth creation.”
However, he warns that concerns remain: “Not least around future liquidity, as more illiquid investments become the best option for higher yields. As well as property, other relatively illiquid investments such as infrastructure and credit are coming increasingly into play.
Long-term infrastructure projects offer good yields but are illiquid over the project term; and credit is an evolving asset class that can drift into the shadow banking space, with asset managers often regarded as an easier source of credit than the banks. Meanwhile, the continued importance of multi-asset strategies in Eurozone fund inflows reflects the desire to spread risk across asset classes.”
Emerging markets with their heightened volatility and relatively poor performance is judged a disappointment by Stockell, who writes that this is a factor that means the shift of assets from cash back into the markets is focusing mainly on mature markets. “With the fears over China being overplayed – it’s increasingly evident that viewing the emerging markets as a homogenous group is an approach that’s no longer fit for purpose. While European emerging markets have not performed as well as hoped, some in Asia in still powering ahead.”
In conclusion, Stockell believes that in the long run, the question may be whether China should still be designated as ‘emerging’. “It’s certainly hard to think of any other emerging market where a burst of volatility would have had such profound impacts on other markets around the world.”

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