Buxton: equities are cheap, there's no merit in panic-selling

Schroders UK equity head Richard Buxton stresses equities look cheap and says now is the time for central Banks and governments to act to help 'level-headeded' assessment of markets. 

Buxton writes:

Once again, equity markets are plunging.  Why, what is likely to happen next and what is the outlook?

The recent deterioration in US economic data, highlighted by the shockingly poor Q2 GDP numbers, has seen the markets pull the plug on their future growth and earnings estimates. 

Rising numbers of high-profile profit warnings from selected industrial companies have dominated a results season which has otherwise been broadly reassuring.  Once more, oil at $120 has acted as a complete brake on economic activity.

Meanwhile, the latest ‘buy time’ rescue package for Greece was immediately tested by the markets pushing Spanish and Italian bond yields out, forcing further promises of fiscal retrenchment by them in exchange for the ECB stepping in to buy their bonds, forcing yields down. 

Finally, the S&P downgrade of the US credit status has caused markets to doubt the sustainability of the fiscal stimulus measures which have been so key to engineering the modest recovery seen over the last three years. 

Common to the Eurozone sovereign debt crisis and the US credit downgrade is not only the debt itself, but a fall in market confidence in policymakers’ ability to tackle the debt and growth issues effectively.  This is why the markets are rioting, effectively sending their signals of discontent much as those on the streets do.

Once the markets fall as heavily as they are doing, forced selling and a buyers’ strike ensure far heavier falls than would be justified by valuations, even on some pretty gloomy expectations about future growth rates or profit levels.  I

It is at this stage that governments and central banks have to intervene to stop the downward spiral and cause a more level-headed assessment of the outlook. We would fully anticipate such action pretty swiftly.