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Immune to cheap central bank liquidity, investors look for value

Chinese stocks took another dive as the preliminary manufacturing PMI showed signs of further contraction in September.

It would have been absurd to expect a miraculous rebound from Chinese manufacturers as the underlying commodity market, perhaps the most reliable leading indicator, continues suffering unprecedented losses. Investors have had a tendency to pull out of the stock markets on a broader conviction that the current stock prices do not reflect the value of the underlying businesses.

In Europe, the PMI data painted a more optimistic picture. French manufacturers may have reversed the shrinking trend in business and could start showing signs of expansion in autumn. The French GDP however remained unchanged over the second quarter, adding a slightly darker shade to Hollande’s rosy perspective on growth.

In Germany, the recovery seems to be rather stable and the recent worries regarding the euro appreciation have certainly already become an old story. The DAX, heavily hit by the aggressive sell-off in Volkswagen since Monday, is expected to take a breather. The euro testing the 1.11 mark against the US dollar should lend some additional support. The oversold market conditions should attract investors chasing dip buying opportunities, especially in value stocks.

It must be said that the contagious slump in the auto market on the back of the VW scandal may well have implications for Germany’s growth picture over the medium term and the depressed commodity market is something of a drag on upside momentum as investors prefer defensive sector and remain timid on high-beta boosters.

As a final note, the high volatility is the proof that the stress in the stock market is a developing story. Large swings, negative but also positive, suggest that there is more potential on the downside. Longer period of cheap central bank money has lost its placebo effect. Investors sell despite the delay in Fed normalisation and signals of an ECB QE expansion. As the extra liquidity has served to puff up the stock prices mostly, the business remained far behind in the race.

Of course there is value in investing in stocks; the selection process will however gain importance as the debasement in stock indices will increasingly bring forward the discrepancies between solid and fragile stocks. The preference is for solid book values.