Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined by Graziano Creperio from M&G to talk about market volatility and where the opportunities lie.
Hi, Graziano.
Graziano Creperio: Hi, Emma.
Wall: So, we are here today to talk about market volatility. It has been a particularly difficult year for volatility, 2018. What's caused the most recent bout?
Creperio: Yes. So, the recent sell-off has been indiscriminate across equity markets globally and we think is not consistent with fundamentals, got nothing to do with fundamentals. Because in terms of economic outlook, the growth is still stable. It's softened a little bit compared to last year, but is still healthy, we are still talking about 3.5% global growth. In terms of inflation, it's only modestly rising. So, it's not creating problems for margins and corporate earnings. And corporate earnings as well are still robust. Yes, they have come down from the peaks of 2017, but they are still robust. So, we think that there is an obsessive focus to risks towards the downside and the recent sell-off has basically been caused more by overreactions to fear around trade war, around the possible Chinese slowdown and around geopolitical risks in Europe.
Wall: Now, you say it's been indiscriminate which presumably means it's created some investment opportunities. So, where do you – as a multi-asset investor, of course, you can go anywhere you like – where are you seeing the greatest opportunities?
Creperio: At the moment, we see more opportunities in the equity markets which obviously have sold off more meaningfully. In particular, we think that in the emerging markets space this sell-off has created opportunities to increase exposure and in particular to Asian equity markets. From a behavioral perspective, we think that the current sell-off – it's interesting to note is how we started the year with a very bullish consensus on emerging markets, but now the narrative is very much negative and focused only on the external headwinds such as US rising rates and trade war. But the sell-off is basically telling us that the market is pricing in a further deterioration in fundamentals. But we see no evidence of that – of a major eminent slowdown. So, given how valuations have got cheaper, we think there is an opportunity to increase and add to this basket.
Wall: Now, of course, I know you have said that you think people are becoming too risky and sentiment is too negative. But are there any things that we should be concerned of? Should we, for example, be watching the Fed rate or the US dollar valuation? Is there anything in these particular markets that investors should worry about?
Creperio: Yes. We should probably look mainly at two things. So, one is, how fundamentals will evolve. Because the market seems to be very skeptical about fundamental growth for the next year, but at the same time, the recent softened data that we've seen coming out globally is just slightly slow than compared to the peaks that we've had last year. So, we are still on very good rates. And as well, we've been hearing about the possible Chinese slowdown. But what we are forgetting is that the Chinese authorities have already stepped in and intervened, there is monetary policy, fiscal policy, they've got trades and they've let their currency depreciate. So, they've basically decreased any potential negative impact of a trade war.
And the second thing we should look at is the increase in rates in the short-term rates in the US, because that's basically the building block for valuations risk asset across the globe.
Wall: Graziano, thank you very much.
Creperio: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
