European stocks are having the worst start to the year in about four decades.
However, Goldman Sachs’ European equities strategist Sharon Bell told BBC Radio 4’s Today programme that the equity slump has made stocks so cheap that it’s actually pretty attractive for medium term investors.
This is even though Goldman Sachs are “pretty pessimistic” about the FTSE 100 performance.
When Bell was asked by the BBC presenter as to whether the crappy start to 2016 for European, and in particular UK stocks, made it look “cheap and attractive,” she responded:
“I think so, a little bit yes. For a medium term investor, yes. You’re looking at a dividend yield on the FTSE 100 of 4%. I think some of that yield is vulnerable, particularly because of a lot of it is paid for by commodities companies but even on the FTSE 250, being a mid-cap index with more UK exposure, there’s a dividend yield of 2.5-3%. I think it’s looking reasonable.”
The FTSE 100 has had the worst start to the trading year in around two decades.
This is mainly because of tanking oil and commodities prices and the growth slowdown in China.
“The UK has had its worst year for a couple of decades, in Europe it’s the worst start in 40 years,” said Bell.
“It has been an incredibly weak period. There are a lot of concerns; China growth has weakened, the China currency has come down — you know how important China is for global growth and companies. It’s not just devaluing of the currency, it’s what’s driving it — it’s the weaker growth backdrop for China.
“We’ve had a lot of growth indicators recently in manufacturing but also some of the services side that suggest the economy is slowing a bit. It has been slowing in the second half of last year and it clearly hasn’t stopped. There’s been quite a lot of policy easing measures,” she added.
China’s financial markets are in turmoil at the moment. You have crumbling stocks, which were barely being controlled by the government’s circuit breaker mechanism which prevents equities falling by more than 7% in one trading session, and the devaluing of the currency which is one of the drivers for the stock falls and of course the wider issue of the slowdown in China’s economic growth.
This is how bad China’s stock markets have fared since just the beginning of the year:
Goldman Sach’s Bell added that while people are watching stock performance, it’s the currency that investors should be worried about.
When the BBC presenter asked “what’s the big event we should look for?” and “what’s the Lehman brothers moment, what’s the big threat?,” she responded:
“Hopefully we won’t get such a severe event like the ‘Lehman Brothers’ moment, in China the currency is the thing people are watching because that’s indicative of the health of the economy and growth and it’s important because if the RMB or CNY depreciate quite a bit then there are quite big implications for the region.
“[This includes] competitiveness of the world vs China, it’s got the implications for capital outflows versus China, implications for China’s purchasing power for commodities and as we know commodity prices have been very weak recently too. So there are plenty of implications right there.”
As my colleague David Scutt reported this morning from Asia, by recent standards was a quiet session for Chinese markets on Tuesday, although, amidst the relative calm, there were some crazy movements yet again in the Chinese renminbi.
Helping to boost sentiment at the start of trade, the PBOC fixed the USD/CNY rate at 6.5628, fractionally weaker than the 6.5626 level of Monday but below the last traded price of 6.5695 seen on Tuesday.
So even though the European stock markets look bleak at the moment, for the right investor, it looks like the tumbling prices could be a good opportunity for a certain kind of investor.