Uncertainties around China and the prospect of US Federal Reserve tightening dominate the outlook for markets in the fourth quarter, according to Russell Investments’ global investment strategists.
Russell Investments’ 2015 Global Market Outlook – Q4 Update report says that although the Chinese economy is decelerating, policy instruments will forestall major financial distress and prevent the threat to overall global growth. With volatility expected to continue through to the end of 2015, the team is neutral on the A-share and H-share markets and does not recommend initiating positions in Chinese equity markets. However, in the longer term they expect to become increasingly optimistic as Chinese monetary and potentially fiscal policy begin to stabilise the economy.
The team continues to expect that the US Federal Reserve will begin to hike interest rates in December, but says the pace of interest rate hikes will be more important than the initial timing. Two key developments to watch according to the report, are the extent to which asset price volatility ripples through the real economy and the sustainability of US earnings.
Europe remains the team’s most preferred equity market, followed by Japan and they remain cautious on the US, UK and emerging markets. In the UK, despite a robust outlook for economic growth, concerns are growing about the sensitivity of the UK equity market to the slowdown in the emerging world. With UK earnings continuing to disappoint and a slowdown in emerging markets worsening, the team have increased their underweight position in UK equities.
Wouter Sturkenboom, Senior Investment Strategist at Russell Investments, said: “The volatility created by uncertainty over the Fed and China is unlikely to subside anytime soon. Our medium term outlook for the global economy is still positive though, and global equities should deliver moderate returns. Markets are going through an inflection point rather than a turning point, and market pullbacks can be an opportunity to add more risk exposure to globally diversified multi-asset portfolios.”
“While our outlook for the UK is for robust growth of 2.3% – 2.8% in 2015 and for gradual monetary tightening to commence in Q4 on the back of rising wage growth, we have been worried about the UK equity market’s sector composition all year long. With its big weightings in commodities and materials sectors and with the slowdown in emerging markets we decided to increase our underweight position in UK equities.”