A matter of days ago you'd be forgiven for thinking markets were collapsing around our ears. Headlines screamed of stock market falls not seen since the last recession and every index around the world appeared to be plummeting in sympathy with China's stock market crash.
But after two days of high drama, China stepped in to cut rates and European markets picked up. Commentators are calling this rout an opportunity rather than a disaster and fund managers are seeing this as a time to hunt for value.
China's ticking time-bomb finally went off this week, unleashing the crash that many have been anticipating for some time. With everyone on holiday, the impact of China's surprise decision to devalue the yuan on 11 August in a bid to prop up its ailing economy had a particularly vicious impact. By lunchtime on Monday 24 August the FTSE 100 had fallen by more than 4.5 per cent, wiping in excess of £60bn off the index, and it continued to fall throughout the day. In the US, the Dow Jones also plummeted in early trading, losing more than 1,000 points almost immediately when markets opened – the worst drop in a day since 2008.
The FTSE 100 initially took a beating due to its high concentration of mining giants and UK blue-chips with reliance on Chinese trade. But the current market rout looks more like a tantrum than a crash based on stock fundamentals, and fund managers are seeing a buying opportunity.
Stephen Bailey, fund manager at Liontrust, says: "The magnitude of the UK equity market's correction looks overdone to us and we think we are now looking at a summer stock sale that is not to be missed.
Market volatility has risen and in these situations one has to resist the temptation to get caught up in short-term herd behaviour: rather than sitting on the sidelines waiting for the turmoil to blow over we have instead been deploying fund inflows into our favourite areas of the market, such as the telecommunications sector and several names in financials (but not banks)."
Julian Chillingworth, chief executive officer at Rathbones, says: "Financials will be an area of interest over the next six months and, if the UK and European economies remain reasonably robust, you could look again at consumer-related stocks, leisure to a degree and retailers.
But the jury is really out on the major miners. They are looking optically cheaper in yield terms than they have in some time, but they are directly affected by the sell-off. We believe BHP Billiton (BLT) and Rio Tinto (RIO) are more defensive so have scope to cut capital expenditure and pay out dividends in the next five years, but there are other miners for which that won't be the case. On a day like today [Monday] you sit tight, but we will be evaluating whether we want to do some bottom-fishing."
Should that enthusiasm extend to your own portfolio? Jason Hollands, managing director at Tilney Bestinvest says: "Of course when markets are tumbling and fear drives investors to run for the exit, it can often present buying opportunities.
Funds with greater flexibility to pick stocks from across the full bandwidth of the UK Equity market have more scope to own companies that are less exposed to the emerging markets and have domestic earnings reliance."
Mr Hollands says these include Liontrust Special Situations (GB00B0N6YF70) and Standard Life UK Equity Income Unconstrained (GB00B7G8Q193).
But he warns: "watch out for value traps. On the surface, price-earnings ratio valuations of Asian and emerging market companies are becoming more enticing as prices slide, but that's if you assume that current earnings can be sustained."
It is likely more distress selling may come so instead of moving out of funds at rock bottom or trying to buy into a dip, your best bet could be to hold, stay calm and wait for the dust to settle.
Q&A
How much might I have lost on the FTSE 100?
Over one month the FTSE 100 is down 9.7 per cent and over six months 13 per cent. However, over three years the index is still up 13.8 per cent and you will have been taking income on that each year if invested.
What kind of losses have funds experienced?
According to FE Trustnet, M&G Recovery (GB00B4X1L373) lost more than 10 per cent in the past month and M&G UK Growth (GB00B6677B69) has also fallen by almost that amount. On average, funds in the Investment Association UK Equity Income and UK All Companies sectors have lost an average of 6.4 per cent and 7 per cent, respectively, in the past month. But these are long-term holdings and over 10 years the average fund in these sectors would have earned you a return of over 80 per cent. Keep the long term in mind.
Commentators' top tips Don't act rashly "Avoid knee jerk reactions," says Mr Hollands. "If you are a truly long-term investor take care not to act rashly during periods of heightened volatility or get blown off course from your long-term plan." "The recent sell-off has turned into a rout today. In such times it is important to keep your head and remain focused," says Adrian Lowcock, head of investing at AXA Wealth. "While a 6 per cent drop is disconcerting, investors who stay focused on their long-term goals and objectives will probably benefit as they are able to ignore the noise." Hold defensive assets "Absolute-return funds can make money in a falling market as well as a rising market, helping investors protect their portfolios. Likewise assets such as gold are seen as safe havens particularly in times of volatility," says Adrian Lowcock, head of investing at AXA Wealth. Mr Hollands recommends holding funds in equity markets with accommodative monetary policies such as Japan and the Eurozone, as well as UK funds with a slant towards the domestic economy. Don't fall foul of value traps "Over the long term, the best time to buy is usually when it feels really uncomfortable, so adventurous investors with a long time horizon could look at the current situation as an opportunity," says Laith Khalaf, senior analyst at Hargreaves Lansdown. "Oil & gas and mining stocks have fallen significantly, so may start to attract investor attention. However these companies come with a risk warning attached: they are largely at the mercy of global commodity markets and the reason yields look so high is because the market isn't entirely convinced dividends will be delivered." |
