Crisis not a correction: Fund managers believe equity markets are set to rally this autumn after a dire summer

Markets have been in short-term crisis mode
This summer’s equity markets were carnage, with stocks rising and crashing like waves on a beach. China experienced a “Black Monday” in August as its markets plunged, and sent shares around the world tumbling.
Miners and commodity stocks led the way down, as worries that demand from China would be lower sent prices of materials to 11-year lows at one point. Hundreds of billions were wiped from the value of stock markets around the world. “Since the summer, trading has been largely driven by negative reaction to growing evidence of a global slowdown,” explains Russ Koesterich of BlackRock.
Many investors will be approaching the autumn with a sense of trepidation. The US Federal Reserve held off from raising interest rates in September – even though it was widely expected – citing worries about the global economy.

AUTUMN RALLIES

But despite this, many investment managers believe the stock market falls around the globe were excessive, and paint an overly bearish picture. For them, the reality is that investment markets are not facing Armageddon – and are actually going to rally this autumn.

CRISIS MODE

“We are more in a crisis than a correction,” argues John Husselbee of Liontrust. “I don’t think we are in a similar state to 1987, 2008 or the tech boom – those were corrections.” For him, the recent selling has been by investors in short-term crisis mode, rather than a state of all-out doom and gloom.
Investment markets are driven by sentiment, and sometimes herd behaviour means sectors become overly bought or sold. In the run-up to the summer carnage, many investors were arguing that risks around the globe – such as China’s brewing equity bubble and slowing economic growth – were being ignored. Markets just brushed off any bad signs and kept moving upwards. “I think complacency had set in. The pendulum had swung towards fear of losing out,” says Tom Becket of Psigma Investment Management.
The equity falls can be read as a pivotal moment when investors stopped being complacent and started reacting to the known risks. This is different to there being new information which ought to make investors worried, explains Husselbee. “August and September are a period when we tend to see the weakest markets, particularly in the northern hemisphere. I don’t think we have learned anything in the last six months that we didn’t already know, and now [the risks] are already factored into the price,” he says.

RISING FROM THE GLOOM

As for the sectors which could do best, the most heavily sold-off are the first candidates. “If there is going to be a rally from here, it could be a painful rally because people aren’t exposed to the thing that could do well. Such as energy, mining and anything related to emerging markets,” Becket says.
Husselbee also highlights emerging markets as “the biggest area of opportunity”, but says he is investing cautiously. “Everybody hates emerging markets. I like them, but I am not fully invested. There may be another fall, which will be an opportunity to buy.”

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