Bargain hunting on the markets after the selloff

Equity markets tumbled and volatility spiked at multi-year highs. After a short break driven by Ecb's meeting and Mario Draghi's press conference, the new week looks like to resemble the preceeding one. Financial markets remain volatile but there is no evidence of a more pronounced economic slowdown. Thus the recent selling looks overdone. 

Equities sold off aggressively for most of last week before rebounding strongly at week’s end. As last week’s gyrations show, financial markets remain volatile. The good news is that, absent evidence of a more pronounced global economic slowdown, the recent selling looks overdone. And that could mean some bargains are emerging. 

Credit markets also remained under pressure. High yield “spreads, the difference between the yield of a high yield bond and that of a comparable maturity U.S. Treasury, widened on expectations for rising defaults in the energy sector. Meanwhile, the weakness in high yield is also infecting investment-grade credit.

The selling earlier in the week was driven by the same litany of factors that has been troubling investors for months: plunging oil, falling U.S. earnings estimates, concerns over China and slowing global growth.

In our opinion, much of the recent selling has been overdone and, as such, has created some bargains. Take fears over a Chinese economic slowdown, which were the initial catalyst for this year’s selloff, as an example. Recent data are showing the economy is not headed toward a hard landing. Reports on retail sales, industrial production and fixed asset investments were roughly in line with expectations, although fourth-quarter gross domestic product decelerated to a 25-year low. But fears over a more pronounced slowdown in China have added to the pressure in other Asian markets.

Despite the recent volatility, we remain constructive on Japanese equities, particularly as the latest selloff has returned some value to that market. Closer to home, one of the few bright spots last week was the U.S. financial sector. Although earnings overall have been lackluster, financial companies, notably Morgan Stanley, JPMorgan and Bank of America, are producing better-than-expected results.

Source: BlackRock