Battered investor morale in UK equities

Extreme positioning, incrementally positive news flow and a desire to protect performance into the end of the year could well prove powerful catalysts, according to Simon Murphy, manager, Old Mutual UK Opportunities Fund and Old Mutual UK Equity Fund

The last few months have been a torrid time for stock market investors globally, and whilst emerging markets have seen the worst of it, western markets have been far from immune.

Indeed, from its peak in late April the UK’s FTSE 100 index lost almost -17% to the recent low in September. As we move into the fourth and final quarter of 2015, and thoughts inevitably start turning to the festive period, what is in store for the stock market into year end and beyond?

Having been cautious on the market for most of 2015, we find ourselves considerably more enthused today – particularly as investor sentiment has become seriously depressed following the recent market fall. Whether you look at the traditional investor sentiment indices or some of the more proprietary ‘panic/euphoria’-type models from the sell-side, they all paint a similar picture of pessimism. Extreme moves in investor sentiment are often a good contrarian indicator, at least in the short term.

More fundamentally, it appears to us that the immediate sources of investor angst over the summer – potential interest rate increases in the US and an economic meltdown in China – have the capacity to offer investors some relief here.

The economic slowdown in emerging markets appears to have introduced a new dynamic into decision-making on monetary policy in the United States, with the Federal Reserve explicitly referencing it in the central bank’s rationale for not raising rates in September. Consequently, and despite a still robust outlook for the US economy, expectations for interest-rate increases have been pushed firmly in to 2016.

With regard to the Chinese economy, whilst growth has clearly been decelerating, the data have not been universally bad and policy makers have been increasing stimulus for some time. House prices and transaction volumes appear to be finding a floor; car sales have been strong; and as an importer of oil, the economy should benefit from lower prices eventually. Anecdotally the corruption purges in the country have led to a hiatus in investment decisions that one would hope should ease over time.

So depressed sentiment and some incrementally better (or less bad) news has the capacity, we believe, to push the UK equity market higher over the near term – the classic seasonal rally, if you will. What’s more, we think these two catalysts may well drive noticeably different sector leadership in this next phase than so far this year. We are thinking here primarily of emerging market-related equities, which as is well known, have been severely punished year to date.

As with wider market sentiment, investors (if you believe the surveys) universally loathe anything related to emerging markets – think oil & gas, mining, luxury goods, select industrial companies etc. – whilst simultaneously adoring anything exposed to the US and UK domestic economies. A combination of extreme positioning, incrementally positive news flow and a desire to protect performance into the end of the year could well prove powerful catalysts in the months ahead. 

So we are optimistic in the near term and believe Santa may well visit UK investors early this year, but not necessarily in the areas of the market in which so many are comfortable. And will the party carry on into the New Year, or will the inevitable hangover kick in with a vengeance? Well that’s a question for later. For now, find a glass, raise a toast and enjoy the fun. Merry Christmas.