In light of further falls in Asian equity markets, here are the views of Richard Buxton, Head of UK Equities and Manager, Old Mutual UK Alpha Fund on the implications for the UK stock market.
China woes open up buying opportunities
- Markets are caught up in a vortex of fear between China’s growth falling away and a possible US interest rate rise
- These fears are understandable but hardly new. China has been weakening for months. It is now front page news and creating a classic spiral reaction
- Risk and reward are now very attractive, so the scope for further bad news to negatively impact prices is probably less than the ability to surprise on the upside
- The US Federal Reserve will keep a very close eye on the situation before it contemplates making a move on interest rates in September
- The yield curve has actually been flattening in recent weeks, suggesting that the chances of the US tightening have been reduced
- China continues to have significant scope for further policy stimulus measures
Effect on the UK equity market
- Amongst UK equities we strongly believe there is a longer-term valuation opportunity opening up in mega caps (typically those companies with a value of over US$ 100 billion), akin to what we saw in the late 1990s
- Interesting to note that while the FTSE 250 index (made up of medium-sized companies) is up by almost 5%* year to date, the larger FTSE 100 index is down by almost 6%*. Real valuation anomaly opening up here
- Volatility is exacerbated by thin, summer trading volumes, so presents further opportunities
- It’s not just oil and mining companies that represent good value relative to historic valuations
- Indiscriminate selling is taking place across many sectors
- As a result we are looking to top up on pharmaceutical holdings (AstraZeneca) and telecommunications (Vodafone) as well as miners such as Glencore
- Meanwhile, at the Bank of England, Governor Carney continues to flit between a hawkish and a dovish stance on the likely path of UK interest rate movements. Needless to say, much like the rest of us, he’ll be keeping a watchful eye on global equity markets
*Figures correct as 26 August 2015.
Any views and opinions of Richard Buxton do not represent TD Direct Investing.
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