The risk-off sentiment seen in financial markets since the beginning of the year continues to steer and prolong volatility across the globe. Rightly so, the lack of clarity in Chinese data figures, poor Eurozone growth, a slowing US economy as well as the ongoing energy and commodity crisis, appears to support the theoretic argument that investors are behaving rationally.
Market panic and investor concerns often turn into a market reality and add to market woes through herding, whereby investors sell-off rumors through little fundamental justifications. The recent sell-offs seen in global equity markets over the past weeks were a direct amalgamation of poor global fundamentals and herding.
The market situation may not be as bad as feared. Although the Chinese currency has significantly weakened in the past few weeks as a result of poor and unclear economic data, the People’s Bank of China (PBOC) reiterates its stance that its objective is to maintain stability of the Chinese Renminbi.
China as the largest holder of foreign reserves has in fact been selling its reserves to stabilize the Renminbi against a basket of peers, namely the appreciating USD. Market fears seem stemmed from hedge funds taking speculative positions on China’s ability to payback foreign denominated debt assets, which would significantly increase in real terms as a result of the weaker local currency.
Even if the selling of foreign reserves were to fail to avoid further depreciation, the PBOC would implement capital controls to ensure the trade balance doesn’t suffer as a consequence of speculative investment positions.
Chinese demand for basic materials as measured by analysts remains unchanged compared to previous years, signifying the country’s trade balance surplus remains strong, supported by the higher current account surplus reported in February.
Focus should in fact turn to the energy and commodity crisis which seems to be the pillar of the global risk-off sentiment. US high yielding securities have been highly impacted as the majority of corporate issuers find themselves in the energy sector, where debt issues are now trading at wider spread levels on the back of higher default risks attributed to the sector.
The impact is having its repercussion on the overall US economy as data figures remain bleak to say the least to justify future rate hikes by the US Federal Reserve this year.
The same applies to the Eurozone. Mario Draghi last Monday spoke on the continued weakness and lack of growth being experienced by the Eurozone, a direct consequence of the low commodity prices being experienced worldwide.
The production freeze agreement this week between Saudi Arabia and Russia has no doubt already had an impact on equity markets as Asian energy companies led the gains worldwide. The news may be a turning point for market sentiment, notably equities, as a recovery in commodity prices may ease the pressure on the energy sector worldwide.
Notable results may take a few months or quarters however to have any significant impact and market volatility could very well remain present. Should a solid agreement between OPEC members be reached to curb production, the resulting rebound in commodity prices may very well be dragged by the recent Oil exports out of Iran.
With approximately 25 per cent of global government bond markets currently offering negative yields, the risk-off sentiment seems well in full swing. I believe investors should take a cautious approach and imperatively take Bottom-Up investment approaches, notably for US high yielding corporates in the energy space.
A turnaround may very well be on the horizon but until then caution and fundamental analysis should be the objectives, so as to cancel out any future herding and ease the transition to rediscover investor risk-on sentiment.
Disclaimer: This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.