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Another reason for our defensive posture in stocks

August 21, 2023

Below is an article by Business Insider that points to the risks in the markets and another reason for our defensive posture in stocks: 

The veteran investor highlighted key economic threats to global equities including high interest rates and China's slowdown.

"I think the downside in markets is very big, still, at these levels and they're not priced for it," he said. 

Global stock markets have had a strong year-to-date run-in spite of economic uncertainties "because people are stupid" and too complacent, veteran investor David Roche said. 

The Independent Strategy president highlighted key risks to global output, including a slowdown in China, Russia's sanction-hit economy, and high inflation across the West. 

"Equity markets are up there because they think these things are not related. They are related," Roche said during a recent interview on CNBC's "Squawk Box Europe."

US stocks have staged an impressive rally this year thanks to investor excitement over artificial intelligence and hopes that the Federal Reserve will soon end its interest-rate increases. 

On China, Roche stressed risks related to the country's floundering property sector. Beijing does not have "the amount of young people which would justify a renewal of the housing cycle," he said. "They can't get that engine motor of growth going again," he added.

At the same time, Russia's economy looks like it's getting hit hard by sanctions now, Roche said. Western sanctions on Moscow's energy exports have crippled the country's pivotal revenue streams, with profits from crude and petroleum products tumbling 31% in June. The nation is also struggling with a plunging ruble, a mass exodus of workers, and a dramatic collapse in its current-account surplus. 

High interest rates in the US - as the Federal Reserve continues with its aggressive monetary policy campaign against inflation - is another key risk to equity markets, according to Roche. 

"Much longer higher interest rates means that they actually have to squeeze profit margins in order to get inflation figures to come down," he said. The Fed has hiked interest rates from near-zero levels to upward of 5% over the past year and a half in a bid to cool surging consumer-price pressures. 

"When the correction comes, when people realize that profits are part of the adjustment to lower inflation, and when they realize that all these problems that you see from Latin America … and when you look at the problems in China, I think the downside in markets is very big, still, at these levels and they're not priced for it," Roche added. 

"This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results.  Investors should always consult their financial advisor before acting on any information contained in this newsletter.  The information provided is for illustrative purposes only.  The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."