Investment Clock insights

Weak start of year creates buying opportunity for stocks

Trevor Greetham

13 January 2016

Stock markets have started the year badly on renewed concerns around China. As result, our composite sentiment indicator has plunged to 2.5 standard deviations below average (chart 1), a level not seen since last summer’s sell off. Things could get worse before they get better but our analysis suggests that such state of panic creates a good opportunity to buy stocks. We are encouraged to see the authorities in China showing a willingness to calm the markets and we don’t see small fluctuations in the yuan as evidence of an imminent collapse in the Chinese economy. Fear of China exporting deflation also looks misplaced as policy makers are trying to keep the currency stable against a basket of its trading partners’ currencies.

We remain overweight equities versus bonds and have added to our exposure. We expect global growth to pick up in 2016 as the effects of a low energy price and loose monetary policy boost consumer spending in the US and Europe. There are tentative signs that the global industrial cycle may be troughing (chart 2). An upturn in business confidence would surprise a pessimistic consensus and see a move back into stocks.

Chart 1: Our composite investor sentiment is flagging a buy signal

Chart 2: Are leading indicators troughing?

The value of your investment and the income from it is not guaranteed and can fall as well as rise. This article is for professional customers only. The views expressed are the author’s own and do not constitute investment advice.