Market Outlook February 2016

“The oldest and strongest emotion of mankind is fear, and the oldest kind of fear is fear of the unknown.”

H.P. Lovecraft – 1925 There has been a lot of fear in markets in recent weeks and months and I think it is safe to say that, although it was positive overall, 2015 was fairly tumultuous from an investment perspective. Similarly 2016 has started with further bouts of volatility and in this turbulent environment investors are bound to worry about what the future holds. To make matters worse, all the major newspapers were recently gifted a convenient doomsday story courtesy of Andrew Roberts at the Royal Bank of Scotland when he suggested that investors should “sell everything”. In my opinion, Mr Roberts’ advice is not only wrong, but it is irresponsible. Ross Clark, writing in the Spectator astutely points out that Mr Roberts has some history as a ‘Cassandra’ having incorrectly warned of impending doom in 2010 and then again in 2012. Perhaps he is hoping for third time lucky and certainly if we did all follow his advice, his prophecy would become self-fulfilling. Investment should always be considered as long term and so advising investors to quite literally “sell everything” is wrong on so many levels. Last but not least, let us not forget that the organisation delivering this message is the same RBS that so badly mishandled its own finances in 2008 that it had to be bailed out by the tax payer. Mr Roberts’ pedigree is questionable at the very least.

Despite Mr Roberts’ assertions, I do not believe that we are facing a doomsday scenario. I do believe that we will face continued volatility during 2016, but it will by no means be one way and I think that some parts of the world economy will surprise. China in particular has been talked down over the last 6 months and almost written off and I am not convinced that is the right approach. Yes, there are issues as its growth settles to a more manageable rate, but I believe that these concerns are already priced in to current valuations.

I believe that the main causes of volatility in markets at the moment are simply down to change and uncertainty. The major change that has taken place has been the US Federal Reserve (the US equivalent of the Bank of England) decision to move away from quantitative easing (QE) and general monetary easing, to a strategy of gradually increasing interest rates, in response to the strengthening of the US economy. The uncertainty is due to the markets not understanding (or even misinterpreting) how this will affect economies around the world, since this is hugely different to the status quo that existed before. From November 2008 until very recently, the markets have been operating within a huge QE comfort blanket that has meant that pretty much all assets (the good and the bad) have performed positively. Now that the blanket has been taken away, markets are unsure as to what will follow and so we see these regular bouts of volatility whilst markets work out solutions and strategies to the new uncharted environment.