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Phew! Markets are through the worst, says Fidelity
The volatility which has plagued stock markets since last summer's 'Black Monday' rout is beginning to subside, says Fidelity's Dominic Rossi.
by Daniel Grote on Mar 24, 2016 at 08:00
Investors are now through the worst of the volatility which has plagued markets since last summer, erupting with spectacular force on 'Black Monday' last year, according to Fidelity.
Dominic Rossi, chief investment officer at the fund group, argued that the 'third wave of deflation', the moniker he coined for last year's stock market tumult, was now over.
That 'third wave', which followed the financial crisis of 2008 and the eurozone crisis three years later, was sparked by a slowdown in emerging markets suffering from faltering growth in China and rising interest rates in the US.
While the market slump prompted by China's woes led the US Federal Reserve to shelve a September interest rate rise, its outlining of a hawkish forecast for future rate rises when it eventually hiked rates in December led to further stock market malaise.
Rossi said that a shifting in tone from the Fed, and the world's other major central banks, had been one of the key factors behind the lifting of some of the clouds over stock markets.
He pointed to the more dovish message following the Fed's March meeting, in which it pointed to two further rate rises this year, having previously forecast four.
Central banks correct mistakes
'I've been pleasantly surprised that many of the policy communication errors by the central banks have been reversed,' said Rossi.
The Bank of England had meanwhile corrected over-zealous inflation forecasts, while the People's Bank of China had moved to reassure it was not embarking on a sustained devaluation of its currency, the yuan, he added.
Meanwhile consumers in the developed world had weathered the world trade shock well, he argued. 'The real volatile impact of this third wave of deflation is now behind us,' he said. 'We've seen it quite dramatically in trade data around the world. At the same time, what is clear is it really hasn't spilled across to the domestic consumer to a greater extent.' In the US and Europe, he argued, there were 'now signs domestic production is remaining resilient'.
A halt to the dollar's rally, prompted by the Fed's reigning in of rate expectations, has also played a strong role. 'The strength of the US dollar has been the main channel through which global financial conditions have tightened in recent years, he said. 'Since global financial markets and commodities are priced in dollars, the upward move in the dollar meant that the value of the same assets priced in the stronger dollar helped to fall.'
'I don't think the post Fed-meeting weakening in the US dollar is the start of any material depreciation trend, but I do think that the period of dollar appreciation we have been witness to over the last few years is now at an end. This immediately eases financial conditions and should allow elevated volatility levels in financial markets to subside.'
Caution on emerging markets
While the dollar's rally has been checked, emerging markets currencies, badly-beaten up in 2015, have risen this year along with their stock markets. But while emerging markets may be past their trough, Rossi was hesitant to call a sustained rally.
'The emerging markets asset class is still going to be in a workout phase for quite some time,' he said. 'The end of a bear market and the start of the bull market are not the same date. I wouldn't necessarily assume the rally we have seen in recent years is going to last for the rest of this year.'
He struck a similarly cautious tone on commodities, which have rebounded strongly this year. Mining stocks hit 12-year lows in mid-January before rallying strongly, with the FTSE Mining index up 45% over the last three months.
'I think a lot of this rally is technically driven,' he said. 'Hedge funds were very short the sector and it was a very crowded trade. It is very difficult to know when it will end but I think the rally in commodities will fade. I don't think it is really fundamentals driven.'
While the shocks for stock markets may be subsiding, Rossi argued that growth was likely to remain in short supply. Earnings this year were likely to be weak, although 2017 could see an improvement, which would soon start to be reflected in share prices.
And he said he saw little to challenge his view that the US, and particularly technology stocks and healthcare, would lead the way, despite being checked over recent weeks.
'I see leadership reverting to those areas least impaired by recent developments; that is the sectors with high levels of intangible assets and intellectual property, such as information technology and healthcare,' he said.
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