I simply can’t resist the temptation to draw parallels between markets and the autumn storms in the UK last week. The tempest is back. Yes, it was a quiet summer, with volatility in equity, FX and bond markets dropping to multi-year lows. But the lashing of the first storm is still painful, and the finger-pointing has begun. It’s the Fed removing the punchbowl. Wait, no, it’s Ebola. Or maybe the return of the Eurozone debt crisis and the threat of deflation.
Whatever the reason – it’s likely a combination of all the above, and technical factors like profit taking – investors are wondering what’s next. In the absence of a crystal ball, I resort to three opinions from investment professionals. Strikingly, they all tell investors to look through the volatility and accumulate equity holdings.
Alan Higgins of Coutts declares that “volatility brings opportunity.” He says the firm keeps its positive stance on risky assets, as economic fundamentals remain sound. “In particular, we favour buying beaten-up equity markets with defensive characteristics, like Germany and the UK.” He recommends trimming exposure to “safer” government and investment-grade bonds in favour of stocks, as the former’s “future long-term return potential has fallen sharply.”
Similar points have been made by Lothar Mentel of Tatton Investment Management. “Markets are once again severely overreacting, and there is no good medium-term investment justification to accept reduced equity allocations” – partly owing to corporate earnings growth and attractive valuations. Meanwhile, Thomas Lee of Fundstrat Global Advisors points out that 35 per cent of the S&P 500 has a dividend yield higher than 10-year Treasury bills – the highest proportion since 2013, and double the long-term average.
But why are so few in the market telling clients to cut their losses and stay risk averse? How do we know that the peak of volatility and selling is over? Haven’t we learned from 2008 and 2011?
Granted, buying on the dip has been a successful strategy this year. But just because it worked in an environment of low volatility and ample liquidity support doesn’t mean it’s the most sensible strategy in today’s high volatility period.
Similarly, just because risk assets look cheap on a historical basis doesn’t mean they’re a buying opportunity. Could it be that stocks are cheap for a reason? That reason potentially being more gyrations in the market, as sentiment towards the world economy sours further and central banks run out of options to patch up investor confidence. The sun may make an appearance again, giving us a deceivingly beautiful autumn day, but don’t pack away your umbrellas just yet.
City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.