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Investors should not worry about correction, say commentators

6 February 2018

Fund houses and trading firms have said the sharp downturn in the global stock markets should be viewed as a correction, rather than anything more serious.

US stocks suffered their worst fall in more than six years on Monday.  The Dow Jones Industrial Average index fell by 1,175 points, or 4.6%. The S&P 500 took a similar tumble, falling 4.1%, while the Nasdaq lost 3.7%.

Asian markets appeared to follow suit, with Japan’s Nikkei sinking 4.8% before recovering slightly, and South Korea’s Kospi notching up losses of 2.3%.

The sharp drops triggered panic in the markets. However, Abi Oladimeji, chief investment officer at Thomas Miller Investment, said investors need to put the sell-off in context.

He commented: “While the trigger and, for that matter, the timing of any sell-off is always difficult to anticipate, it had become clear for some time that this rally had become long in the tooth and was due a breather.

“As at the close of trading on Monday 5th February, the S&P 500 index had lost 7.8% from its January peak. Nevertheless, it has gained almost 18% in price terms over the twelve months to the end of Monday 5th February.”

Jacob Deppe, head of trading at online trading platform Infinox, said while the fall in markets may look dramatic, it is not more so than the record rises investors have witnessed since the end of November.

He commented: “For that reason alone many would argue a correction was on the cards. The party may be over for now but this could be more of a sobering correction than a rout.”

Kames Capital chief investment officer Stephen Jones echoed the sentiment.

He explained: “This is a complacent positioning correction, coupled with a month end rebalance after what were, we should not forget, super strong returns in January and December for anything tagged as “risk”.

“Plentiful liquidity in markets has also allowed fast money, model and algorithmic investors, to switch positions from long to short in quick time adding to the downward shift in prices. In amongst these moves there is nothing of concern on fundamentals. Data from, and prospects for economies are good. Whilst there is a change in central bank policy and levels of support for markets led by action from the US Federal Reserve, it is being made gradually, and market volatility will in turn temper central bank action further.”

What next?

The question investors will be asking is how bad can the sell-off get?

According to Oladimeji, the important thing to note is that this is a correction rather anything more sinister.

“Investors should remember that economic growth remains robust (albeit the outlook is nothing as rosy as the consensus view suggests), inflation remains relatively muted (despite fears about the risk of sharp increases in wage growth) and corporate balance sheets are healthy.

“Before long, once the ‘weak hands’ have been shaken off, the underlying positive trend is likely to resume, hopefully, at a more sustainable pace if we are to avoid a more protracted risk-off event in the not-too-distant future.”

Jones added that 2018 was not going to be a repeat of 2017 and described it as “good and healthy” that the markets have made this clear so early on.

“Active managers now have a broader set of opportunities to pursue and manage around,” he said.

Nick Dixon, investment director at Aegon, said there were reasons for both optimism and caution, but Aegon is leaning towards the latter.

He said: “On the one hand tech companies have driven much of the index growth since 2009 and these stocks now make up the second-largest component of US markets. But, unlike the period in the period leading up to the dot-com crash, today’s companies are for the most part built on fundamentally sound business models.

“On the other, price to earnings ratios look unsustainably high, particularly in US markets, and we believe many stocks are overvalued. The other great unknown is how quickly the era of cheap money sparked by the credit crunch will come to an end.

“It has been our view for a while that exposure to US markets in particular should have been reduced. Further, in the context of richly valued equity markets and low yields on fixed income, cash has looked relatively attractive, especially for more conservative investors.”

Pension investors 

Ben Gold, head of investment, North at Xafinity Punter Southall, said pension investors should not be concerned about the fall in markets.

“Whilst somewhat unwelcome, let’s put this into context. UK equities have only fallen back to the level they were at in early December, and US equities have barely fallen at all since the start of the year. So 2018 is actually not that noteworthy as it goes, so far at least.

“Let’s also remember that pension schemes are long term investors. They have typically made great efforts in spreading risk by diversifying and managing risk by hedging. So they are well set to ride out what may well be just a blip. Of course, trustees and sponsors should review their portfolio in light of current conditions, but there is no need to overreact,” he added.


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