Let me start by getting one thing clear; nobody can accurately and consistently predict when investment markets will rally.
It’s been a rough start to the year for equity investors, with the latest bout of market volatility causing even the most logical stockholders worrying their shares have much further to fall.
The FTSE 100 index of leading UK company shares had a particularly bad day on Thursday, before rallying by 3% on Friday to close up 170.6 points at 5,707.6.
It had fallen 2.4% the day before, with investors anxious about the state of the global economy.
As we head into a new week, investors are rightly asking what happens next?
Trevor Greetham, Head of Multi Asset at Royal London Asset Management, said:
“When policy makers start to panic, markets can stop panicking.
“We are seeing the first signs of policy maker panic in Japan with Prime Minister Abe holding an emergency meeting with Bank of Japan Governor Kuroda.
“We are going to get a lot of new stimulus over the next few weeks and not just in Japan.”
Greetham expects to see negative interest rates being used more in Japan and in Europe, and expects this policy to increase bank lending and weaken currencies, which would boost exports.
This course of action would lower the cost of credit to the broad economy.
Greetham continues:
“Lately we have seen yen strength and euro strength despite negative rates. Some of this is due to the pricing out of Fed rate hike expectations; some is temporary and to do with risk aversion.
“In a market sell off money tends to flow away from high yielding carry currencies to low yielding funding currencies and this effect is dominating in the short term.
“Like a lot of people, we went into this year’s sell off moderately overweight equities and it has been painful.
“What we have seen has been a highly technical market with many forced sellers among oil-producing sovereign wealth funds and financial institutions protecting regulatory capital buffers.
“However, economic fundamentals in the large developed economies remain positive, unemployment rates are falling and consumers will benefit hugely from lower energy prices and loose monetary policy.”
In his note to advisers, Greetham concludes that the Royal London Asset Management investor sentiment indicator is highly depressed for a sixth week.
They expect markets to rally as policy makers deliver a range of easing measures over the month of March.
In the meantime, as long term investors they have been buying equities into weakness, not selling.
Is it time now for markets to rally as central banks expand their monetary easing?
