Sell out, buy up or do nothing. This is the conundrum investors have faced over the past two weeks. For those owning funds the question is arguably even more complex, as fund investing is essentially a long-term, buy-and-hold investment strategy.
Ignoring the extreme market volatility that has dominated the investment landscape in August is certainly an option, and will save you the costs of buying and selling. But there is a strong case to be made for capitalising on current market conditions by upping your equity exposure to certain regions. Equally compelling are the arguments for taking a more defensive stance. So how should you ride the risk-on, risk-off see-saw?
Many fund managers have been touting the recent sell-off in markets as an opportune time for investors to increase their equity exposure and, in particular, their allocation to emerging markets and Asia. Valuations have fallen significantly, with investors shying away from 'risky' assets. Fidelity's Anthony Bolton describes the current situation as "a time of opportunity rather than a time to become more defensive".
Another Fidelity manager, Trevor Greetham, who heads up asset allocation, however, reports that the company's multi-asset funds moved to a more defensive position in July - underweight equities and overweight gold and bonds - as concerns mounted about the market. "We look at both macro and technical signals and the way markets were trading in the last few weeks in July did worry us. There were a couple of good news triggers - the ECB bailout summit and the US debt agreement - which we thought would lead to a rally in equities, but it didn't. The rally lasted for about two hours."
"The market is very good at reacting to underlying macro factors and we think the reason the market reacted as it did is because an underlying economic slowdown is coming through," he explains.
A market reacting poorly to good news may be indicative of a slowdown, but other fund managers argue that another full-blown recession is an unlikely scenario given the presence of emerging consumers in China and other areas. "The market is a discounting mechanism. It takes a view of the future and discounts this into prices. At the moment the markets are pricing in a severe recession, but in my view this currently seems unlikely," says Alan Miller, chief investment officer of SCM Private, who also sees opportunity in equities.
So to help clarify your thinking, we've weighed up the arguments, looking first and buying more equity-based funds. We've then juxtaposed this with the arguments favouring a more defensive stance. In the process, we've highlighted the funds that should be the best buys in each scenario.
