With global markets ever restless and Thursday’s Federal Open Market Committee meeting likely to produce an additional groundswell or two many investors are still clutching their cash reserves as they wait for calmer waters.
This includes Ben Seager-Scott, investment strategy director at Tilney Bestinvest, who, after paring back his equities exposure into a significant cash overweight just before the summer equities rout, remains cautious on the market outlook.
“A lot of the problems in the market are yet to be resolved,” he said. “They are starting to get recognised, but there are still some fundamental issues and we are not rushing to get back in.
“[The impact of QE] is all going into investments and assets, so we are getting asset price inflation rather than fundamental consumer price inflation-type inflation, and this will be a structural issue in the medium-term.
“It is all part of the new paradigm. On one hand we have QE continuing in other parts of the market, and what China is doing is concerning. It is a fine balance between QE and the short-term risks that the market is beginning to recognise.”
However, while Seager-Scott is not running into the surf just yet, he sees further renminbi devaluation as more of a probability than possibility.
Yuan way or another
Given this outlook, and that in his growth portfolio he is currently holding around 7.5% cash versus a historical average of 2.5%, Seager-Scott outlined how he intends to play such a move as he reallocates into the market.
“Any time volatility drops off and markets are looking slightly complacent China will incrementally devalue the yuan until they reach their end target,” he expanded.
“While so far we have seen some mild disinflationary pressure, if China was to start devaluing the currency aggressively then we could see a big wave of deflation and, ironically, sovereign bonds could start looking attractive.
“When sovereigns are yielding less than 2% it does not look sustainable on a long-term basis. But if China is heading towards a full-fat devaluation driving global deflation then that area could be relatively attractive, even if real yields do not change significantly and start looking fairly unattractive on a long-term sustainable basis. It is difficult, but it could be an area that begins to look relatively attractive.”
While Seager-Scott concedes that riding the yuan devaluation is tricky via direct investment at present, he believes that buying passives could provide an opportune route in.
