Over the last few trading sessions we have continued to see volatility spike, culminating in major declines for most equity indices on Wednesday. There has been a clear shift in investor sentiment, with market participants focusing on bad news and giving limited attention to the good. For example, some of the positive earnings releases emanating from the US over the last week would have normally garnered greater attention.
The fall in the oil price from around $30 per barrel three days ago to around $27 (the result of an Energy Administration Agency warning of persistent oversupply) was the key driver of the decline in sentiment. However, there have also been other negative headlines such as reports from the World Economic Forum in Davos focussing on the risk of market liquidity drying up, a further downgrade of global growth projections from the IMF and poor corporate earnings reports from the likes of Royal Dutch Shell.
While the short-term shift in sentiment is a concern, with markets finding the downside as the path of least resistance, we prefer to focus on longer-term fundamentals. These remain supportive in our view. We continue to believe that central banks will remain accommodative; in some cases (Europe, Japan and China) they even have room to provide increased support. An example of this ongoing support was demonstrated by Tuesday’s comments from the Bank of England Governor, which pushed out any tightening of UK monetary policy. This has driven the pound lower and hurt the financial sector, although it will ensure support for the UK economy for an extended period.
We continue to actively monitor the situation, but we believe the best solution to riding out this period of uncertainty is through a diversified portfolio with a long-term approach, that focuses on areas of the market that are supported by solid fundamentals.
Richard Larner, Head of Research at Brooks Macdonald
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