A barometer of investment sentiment by the UK private bank suggests that events in the Far East, among other forces, have hurt confidence.

Worries about China’s decelerating economy and other forces have delivered the biggest hit to investor sentiment since March 2013, according to a survey of attitudes among 4,355 UK adults by Lloyds Private Banking.
 
While net investor sentiment declined 9 percentage points from last month, overall investor sentiment for this month (3 per cent) is also 9 percentage points lower than this time last year (12 per cent). This means overall monthly investor sentiment is now at its lowest level since May 2013, the bank said. (Net sentiment is a statistic showing the difference between those who hold a positive view and those who hold a negative view each month on the outlook for each type of investment over the next six months. A positive net sentiment indicates that a greater proportion of investors surveyed hold a positive view, while a negative net sentiment indicates a greater proportion of investors with a negative view.) Fieldwork for the survey was carried out between 28 August and 1 September.

Concerns about the slowing of China’s economy and the impact of currency devaluation have driven huge month-on-month declines in confidence towards emerging market equities (-20 percentage points), UK equities (-18 percentage points), commodities (-15 percentage points) and Japanese equities (-14 percentage points).

Sentiment towards UK equities fell by a record monthly amount; however net sentiment towards this asset class is still positive at 19 per cent, making it the second-most appealing asset for investors behind UK property (48 per cent).

Bucking the trend this month, the survey found, is sentiment towards the eurozone equities asset class, which has seen a positive increase of 7 percentage points. This may be driven in part by the European Central Bank’s continued quantitative easing programme and a weaker euro. This is the second consecutive monthly improvement for the asset class; however, it is still the least-favoured option for investors with a net sentiment score of -36 per cent overall.

“In addition to uncertainty created by China, there is much discussion in the investor community about whether the US Federal Reserve will raise US interest rates in September – the first upward move in interest rates since July 2006. The polarised views on this topic may be contributing to further financial market volatility, which in turn may be contributing to the improved sentiment of gold,” Lloyds Private Banking said.

Sentiment towards gold improved by 6 percentage points this month, after falling by over 24 percentage points between July and August, the survey found.

In line with asset class sentiment, actual market returns reflect a similar performance in the past month. In terms of returns earned, gold and UK government bonds both saw increases of 4.6 per cent and 0.5 per cent respectively. Japanese shares saw the biggest decrease in returns (-11.2 per cent), followed by US shares (-8.7 per cent), emerging markets and UK shares (both -8.4 per cent).

In terms of the annual change in actual performance, seven out of the 10 asset classes recorded a fall in returns earned, with commodities (-44 per cent), emerging market shares (-12 per cent) and gold (-12 per cent) seeing the biggest declines. Japanese shares has seen the largest annual growth rate at (15 per cent), followed by UK property (14 per cent) and UK government bonds (4 per cent).

Reactions
The results of the survey prompted a variety of responses. At Plurimi Wealth, Patrick Armstrong, chief investment officer, said confidence had been hit by market turbulence.
"Now is the time for investors to be courageous and reap outsized returns, and avoid the risk of overvalued ‘safe’ investments like government bonds. We have constructive view on the outlook for the global economy, and the growth scare from China is overblown. Equity markets now offer more favourable valuation than they did several weeks ago," he said.

“There are obviously risks, but in Europe underlying economic conditions are improving, rather than deteriorating. The financial and industrial sectors in Europe offer bargains in our opinion. Even the S&P 500, which we began shorting in August of 2014, is significantly below our year-end target of 2015. We closed the short positions in recent weeks as valuations became more attractive following the sell-off. The Chinese growth scare will subside as authorities continue pro-growth policies to avoid a hard landing. This, combined with accommodative policy from the developed world, will lead to a period of sustained strength for global stock prices," he added.

Alex Imrie, investment manager at Smith & Williamson, said: "There is value in the low current prices and we see the pullback in equity markets as an opportunity to invest. Of course, various factors could temporarily derail this view and with fear driving markets in the short term we could see market levels move lower still. However, timing is far easier in hindsight and one should buy when fundamental analysis and objective reasoning suggests. The most attractive opportunities are in developed markets. Falling exchange rates across the Asian economies should mean that inflation remains low across the Western world which, in turn, will be positive for the consumer."

Tom Becket, CIO at Psigma, said: "Only a fool would suggest that markets could not fall further from today's attractive levels, but certainly we feel that certain asset prices and valuations are getting to levels where some equity and credit markets, both in the developed and emerging worlds, will prove rewarding from a medium-term perspective. Having deliberately run higher than average cash weightings for the last few months, we are now assessing specific opportunities to put money to good use."

“In conclusion, we recognise that there are risks to the global economy and markets and would certainly like to see some stability in China and some of the other emerging market economies and asset markets. However, many markets have moved quickly to depict a challenging current environment and in cases now underestimate future growth potential," he continued.

“In general we are comforted both by the prices we are paying for many assets in a world that is still growing and where companies can grow their profits. Unless the conditions we are investing in deteriorate further from here, which is possible in the reduced volume trading environment that is a characteristic of the summer months, we expect to use the significant weakness in some markets to increase exposure to investments we like for the long term," added Becket.