Investors are finding it difficult to “shake off prevailing negativity” associated with equity markets, despite signs of improvement, says Instreet Investment.
Instreet Investment managing director George Lucas says although equity markets are “stuck in a rut,” it is likely that markets will bounce back.
“We think too much risk has been priced in and there is the potential for a surprise on the upside,” Mr Lucas said.
“A couple factors point to this – a weaker US dollar, signs of a rebound in oil prices and improving economic signals coming out of China with reducing fears of devaluation.”
According to Mr Lucas, the commonly held belief that the US dollar will remain strong as the US Federal Reserve continues to raise rates no longer stands.
“Now the perception seems to be that US interest rates will remain low for a much longer period of time, while the European Central Bank and Bank of Japan are assumed to have scope for further monetary stimulus,” he said.
Both the euro and the yen are likely to remain strong, significantly reducing the risk that China will need to devalue its currency, Mr Lucas said.
“Receding fears over a sharp devaluation of the renminbi, along with favourable exchange rate movements, has helped bring an end to the recent string of declines in the value of China's [foreign exchange] reserves.”
For Australia, the market is set to remain subdued until equity markets adapt to the reduction in fear associated with China, Mr Lucas said.
“The banks, however, will continue to provide a headwind as will the general election and stronger yen.”