Recent Market Volatility Is Rare from a Historical Perspective

Scott Glasser

Scott Glasser, Co-Chief Investment Officer and Portfolio Manager for the Appreciation strategy at ClearBridge Investments

By Legg Mason Asset Management

It has been a volatile period for stocks, with major indexes sagging below year-end levels. China sent another shock wave through global financial markets when it unexpectedly lowered the reference rate of the yuan relative to the US dollar. In the United States, consumers are still doing their part as retail sales for July were solid, strengthened by continued strength in auto sales. Crude oil has been making new lows, reaching levels not seen since the depths of the 2008-9 recession. Scott Glasser, Co-Chief Investment Officer and Portfolio Manager for the Appreciation strategy at ClearBridge Investments, a wholly owned affiliate of Legg Mason, believes that the recent market volatility is rare from a historical perspective. “We have had very little volatility in the broader market averages with no 10 % correction for at least 3 years,” he says.

If we look at global economic growth, the story is also little changed – positive and uneven. US GDP grew at a 2.3% annualized rate in 2Q 2015 and personal consumption, a key source of growth, rose 2.9%. The European Union grew 1.3% year-on-year, ending its double-dip recession. Japan is clearly struggling, with private consumption down -0.8% quarter over quarter and business spending also down. For China, a recent estimate is 6.63% growth – a decrease, but in no sense a recession.

China’s central bank has taken various measures in view of the recent market turmoil. The People’s Bank of China (PBoC) sent a loud, if mixed message to the IMF by moving its daily official rate in the direction of the market price four times – and strongly defending the currency when its value dropped beyond a certain threshold. The message behind the moves is of China as willing to make decisive moves toward of a freely-trading yuan, but not seeking to get there right away.

Such moves heightened investor uncertainty about global growth, given the widespread impact of the devaluation. In addition, China changed how it would set the reference rate each day to better align the currency to market conditions. Going forward, the rate will reportedly be set near the closing market price of the previous day – rather than at the sole discretion of the central bank. China’s moves have fueled speculation that its economy might be slumping faster than officials anticipated – and might necessitate more aggressive stimulus measures.

Facing high volatility in the market, investors should be patient and strategic in asset allocation. BM

Glasser shares with BENCHMARK his strategies for the week:

Equity:

  • Opportunities can be found in financials, airlines and I.T.
  • Within I.T., favors semiconductors, on valuation grounds, but largely avoids internet and software stocks
  • Exposures to the utilities, consumer staples, consumer discretionary and materials sectors do not have much upside
  • There are still plenty of attractively valued stocks and many future positives for the US economy

Currency:

  • Prefers to be underweight high-beta positions in Asian currencies against the US dollar
  • Focuses on cross currency positions with positive carry during the current period of US dollar consolidation

Fixed income:

  • Select emerging market (EM) debt offers potential yield opportunities and currency returns
  • US dollar-denominated Asian investment grade and cross-over credits, Asia sovereigns and quasi-sovereign entities are favorable
  • Asian local currency bonds continue to offer attractive value versus developed markets
  • Asia exhibits the strongest fundamentals within the emerging markets and is likely to be a key beneficiary of lower energy prices