New Star comment on recent market volatility
New Star’s joint CIO’s, Gregor Logan and Stephen Whittaker, give comment on the recent market volatility:Gregor said: “A mixture of forced and panic selling has sent equity markets significantly lower. Emerging Markets and Asia have now joined in on the downside.
“So far there is little evidence of contagion to the real economy, but perhaps that is simply because there has not been enough time for the transmission mechanisms to work. As a result, visibility on earnings and asset quality, particularly in financials, has become very poor.
“Liquidity measures remain strong, cash levels are high, but deleveraging has started and may continue. Equity valuations are low, particularly relative to bonds and cash, but are predicated on pre crisis estimates which may now start to come down.
“Upward pressure on interest rates has abated, but for the equity markets to bottom out we probably need interest rate cuts or at least a different rhetoric from the central bankers.
“After moving to a more cautious asset allocation earlier in the year, I think we should now look for opportunities to become more pro-risk, particularly in the financials area. The question is one of timing and we will monitor events in the next several weeks to try to identify a buying opportunity ahead of the seasonally strong autumn period.”
Stephen said: “The mood music of the last few months coming from the Bank of England has been decidedly hawkish with members more inclined to raise interest rates. The market volatility of the last couple of weeks may make members of the Monetary Policy Committee have second thoughts about how much they intend to pursue rate hikes. In fact, the repricing of risk and softening in asset values is probably welcomed by the Bank as it takes some of the froth off asset price inflation. Any sign that we are getting closer to the peak in interest rates should help the equity markets, particularly interest rate sensitive sectors such as banks, retailers and travel and leisure.”