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Short Term Volatility: Long Term Views - Schroders reflects on the recent market volatility in China

Schroders reflects on the recent market volatility in China

At a recent client webcast on the market volatility in China and its impact on the global economy Schroders’ senior fund managers were invited to give their views. Rory Bateman, Head of UK and European Equities; Johanna Kyrklund, Head of Multi-Asset Investment; Gareth Isaac, Fixed Income Fund Manager; and Matthew Dobbs, Fund Manager for Asian Equities & Head of Global Small Cap all agreed that the stock market drop was not largely significant especially compared to the move in China’s currency.

Matthew Dobbs, Fund Manager for Asian Equities & Head of Global Small Cap, Schroders, described the market volatility impact in China as “relatively modest”. He believes a more fundamental issue in China is the fact the economy is transitioning from an investment to a service based economy and is therefore set to grow more slowly in the future. . This does not necessarily present itself as a long term problem, rather Dobbs argues that “a China based on service growth rather than exporting deflation is actually very good news for the global economy. It’s slower growth, but more orderly and disciplined growth.”

Furthermore, Rory Bateman, Head of UK & European Equities, Schroders, does not see China threatening the European recovery and believes Europe could even be a “safe haven” in the midst of slower global growth: “Domestically within Europe we’re confident that things are taking shape; there have been plenty of reforms and quantitative easing has obviously helped the demand picture,” he said.

In addition to China, Gareth Isaac, Fixed Income Fund Manager, Schroders, also highlights the Federal Reserve (Fed) rate rise as a cause for the market volatility: “If a Fed rate rise were to occur this month, markets would react with some volatility because it will be the first rate rise in nine years. However a rate increase, coupled with an upbeat statement about the outlook for the US economy, could serve to restore some market confidence.”

When asked about European risks, particularly Greece, Rory Bateman stated that he was “not too concerned about Greece” in the short to medium term, instead with a potential Chinese hard-landing being much more of a worry.

Focusing on commodities, Johanna Kyrklund, Head of Multi-Asset Investments, Schroders, stated that “we generally expect commodity prices to remain quite low”, which Rory Bateman said “is what is suppressing Europe’s inflation numbers.” Low commodity prices however are seen by Gareth Isaac as “unequivocally good news for developed markets such as Europe, the US and UK but also emerging markets such as China and India”.

When asked about the implications of lower growth for investors. Johanna Kyrklund noted that value resides in commodities, emerging markets and resources sectors. However, she stated “the problem with this weak global growth environment is the lack of a catalyst to take advantage of that value.”

Concluding the discussion Matthew Dobbs said Asia is attractive as valuations have dropped and “Asia doesn’t stay cheap for long”. He does not believe we are seeing the downturn of equities like some believe and said that growth is “likely to remain highly prized”

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Short Term Volatility: Long Term Views 3 pages | 128 kb