Beware the aftershocks: Martin Currie seeks out opportunities as volatility continues

The current bout of increased volatility across equity markets is not yet over, with more shockwaves expected, Martin Currie’s European team has said.
Michael Browne, Portfolio Manager in charge of the group’s European Long/Short Strategy, warned this period of volatility could continue for some time as key drivers of the global economy move in different directions.
“There will be aftershocks for European and global markets as they continue to be impacted by an economic tug of war,” Browne said.
“Markets still have to come to terms with the changing nature and source of global growth.”
The Martin Currie GF European Absolute Alpha Fund* delivered a positive return of 1.5%** in August despite a widespread sell-off, through a combination of successful long and short positions. This compares to the illustrative benchmark index (MSCI Europe) which fell 7.3%. An almost 9% outperformance for the month.
Browne said the team had grown cautious the previous month that markets had run out of steam, as a combination of lower oil prices, a lack of a recovery in consumer spending, and the ongoing fall in capital expenditures all started to impact sentiment.
“In August there was a stark realisation that the US Federal Reserve was about to raise rates as the Chinese and other emerging markets were slowing sharply,” he said.
“Poor reaction to corporate results undermined confidence further and we cut the net exposure to 26% mid-month. As markets fell sharply and became oversold, we rebuilt exposure.”
Browne added that following the sell-off in European and US markets in August, there remained a valuation gap to exploit. Martin Currie’s European Long Short team believes that, on an earnings and price to book basis, the European market is now trading below long-term averages.
“Volatility and negative returns in the summer months has resulted in companies rebalancing and reallocating capital, making markets good value again. This will continue, and we will therefore remain nimble and positive,” he said.
Areas which could be fertile hunting grounds for investors if volatility continues include the commodities space, where the downward pressure on prices could lead to earnings downgrades.
“Although the market has already been pricing in an Asian slowdown it may have to do more, especially if the yuan continues to depreciate. The market has also been pricing in a major oil, gas and materials earnings slowdown and again we believe there could be more to come there,” Browne said.
“However, in our view, the continued deflation in commodities and imported goods has not yet been priced in by the market and again we believe opportunity exists here for investors.”
However, the manager said unless global growth forecasts were cut significantly, there remained plenty of upside opportunities as well.
“Unless the recent events lead to a significant downward revision of estimates, we believe the current situation should be seen as an opportunity for investors,” he added.