China triggers risk aversion
Risk assets suffered during the third quarter as investor doubts about global growth resurfaced.
The trigger was China where activity indicators continued to soften and official intervention in the foreign exchange and equity markets left investors puzzled about the direction of policy.
There have also been questions about the authorities’ ability to control the economy.
The US Federal Reserve contributed to the uncertainty by ducking the opportunity to lift interest rates from zero in September, causing investors to ask whether the central bank knew something they did not.
Meanwhile, the Greek crisis, which had dominated attention in the second quarter, faded into the background as the EU agreed a new bail out.
The continued divergence between developed and emerging economies remains one of the key themes of 2015 and leading indicators suggest it will persist in the coming months.
However, the developed world would not be immune to a significant downturn in China and this quarter’s strategy note focuses on the global implications for economies and markets should this scenario play out.
Overall, our asset allocation stance is to continue to favour equities with a bias toward developed markets.
This largely reflects the attractive equity risk premium, however, given the uncertainties facing the world economy we also hold a neutral duration position in our portfolios.
The increased risk of a China hard landing is one reason why we have remained underweight emerging market equities despite the value offered by the region.
This quarter’s research note focuses on the role of share buybacks in corporate behaviour and we have included the annual update of our seven-year return expectations, which assesses the medium-term outlook for a range of asset classes.
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