New Year, same old story. Equity markets have begun 2016 in comparable fashion to the way in which they ended 2015. Plagued by the same cocktail of woes that begun to pressure markets in the middle of 2015, stocks had their worst week in more than four years.

Key points

  • Equities and other risk assets have begun 2016 in grim fashion
  • But pessimism appears overdone
  • There is long-term value in shares for patient investors prepared to ride out the storm
  • Having said that, caution is the watchword as downside risks are mounting

Multiple confluent concerns over: events in China; a never-ending plunge in oil prices; the impact of the first hike in US interest rates in nearly a decade; the adverse effects on company profits of spiraling debt funding costs; and tensions in the Middle East, have continued to exact a heavy toll on shares.

Stocks suffered their biggest weekly drop since September 2011 and the steepest slide over five days to begin a year on record. Even news of further strong growth in US employment was insufficient to arrest the slide.

The sell-off has not been confined to shares. Oil prices have tumbled nearly ten per cent, heading seemingly inexorably towards $30 per barrel, a level last seen in 2003. Indeed, save for gold and government bonds, the price of almost everything, from stocks to sugar, has plunged.

Already this has begun to lead to a series of siren calls from a number of prominent investors, some of whom have been quick to draw comparisons with the start of the financial crisis. However, at the risk of sounding complacent, we would be wary of some of the more alarmist calls inevitably making their way on to the front pages of the financial press.

Although the sell-off shows little sign of abating, pessimism appears overdone. It’s worth remembering that global economic output continues to expand at a reasonable pace supported by loose monetary policy, while inflation is low and stable. That will support corporate profitability.

Furthermore, valuations do not look excessive. While Price:Earnings ratios (share prices relative to company profits) are above their long-term average, they look reasonable when one considers the extraordinarily low rates of returns available from investing in government bonds.

As a result, while acknowledging that there are sizeable risks at present, we remain moderately bullish on shares and other risk assets. As in the summer of 2015, the steep slide in prices is creating attractive opportunities for long-term investors prepared to do their research and to ride out the storm.

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