But, while there is no doubt that investors are, in the main, feeling rather battered this month – so far in October , the FTSE 100 is off around 11%, the S&P 500 nearly 6% and the Eurostoxx 50 around 10% – the question is what is noise and what are the genuine areas of concern and, more importantly, how should one be viewing the latest developments?
The context
Before going into how we should be thinking about things, it is worth putting some of the falls into context. First, while the falls in October have been severe, they come on the back of five years of rising markets.
Second, as John Smith, senior fund manager at Brown Shipley points out, the FTSE 100 has seen a 10% correction every year since 2009, “this is just another setback like we have seen every year for the past five years.”
“While a lot of short-term risks and volatility remain, we still expect to see a worthwhile rally toward year-end. But, there are likely to be a lot of questions asked in the first quarter of 2015 as people get a bit more clarity on corporate earnings growth and on Europe,” he said.
Stephanie Flanders, Chief Market Strategist for Europe, J.P. Morgan Asset Management agrees, pointing out that the current market volatility is a demonstration of investors' hope that the global economy will be able to match the reasonable growth expectations that have been built into market prices.
"The US economy has more or less delivered, but large parts of the world have not, especially Europe, and inflation seems to be stuck on a downward path globally. In response to these developments a correction is not fundamentally surprising and – given the structural reduction in liquidity in some markets – it is likely to be exaggerated. But it is not unhealthy from the a long term perspective,” she said.
The current worries
Much of the current concern is centred around what the varied and rising troubles in Europe and the threatened slowdown in China could mean for the US economy, which, until now, has been the poster child for the recovery.
And, in this regard, according to Natixis there is no need to panic.
“The issue right now is whether the current scenario of a strong economic recovery in the US needs to be brought into question. As yet, the consensus for the US economy is unchanged,” it said in a note on Thursday.
“We remain positive on the US economy, the weak retail sales need to be put into perspective. GDP growth will reach 3.0% in Q3 2014 before slowing slightly in Q4 2014. The one risk in our scenario lies in inflation, which could be weaker in the US due to the sharp fall in crude oil prices. We also remain positive on Germany. Technically, equity indices still have some downside, but we believe this is more in the nature of an adjustment than a change in the environment,” it added.
Eric Chaney, head of research and Chris Iggo, CIO and head of fixed income Europe & Asia at AXA IM agree that there is no need to worry about the US recovery.
In a note on Thursday Chaney and Iggo point out that the only event that could justify US treasury yields below 2% (levels to which they briefly fell on Wednesday) would be another round of quantitative easing – a scenario they see as extremely unlikely.
“Humbled by what has just happened in the euro area, should we anticipate that in a few weeks, data from the US economy will confirm that the market action was justified? We think the answer is no. The probability of a US recession is close to zero.”
Where to from here?
Richard Jeffrey – CIO at Cazenove is of the view that the recent sell off was more the amalgamation of lots of little concerns rather than any one major one. But, he does not believe that investors should be jumping into this drop with abandon.
“Sometimes, when markets fall, you get to a ‘no-brainer’ moment, when you can afford to ignore short-term concerns and take advantage of sudden decline in prices. This is not such a moment for equities,” he said.
Adding: “Markets are not cheap, and could fall further. Indeed, although we might expect it to remain so, the US market looks quite expensive. UK equities are more attractively priced on a medium-term view, with significant value now showing through in some areas. If you believe growth worries are being over-stated, for instance, considerable value is coming through in industrial cyclicals.”
For Jeffrey, a safer way to take advantage of recent market declines is to focus on dividend yield and growth.
“On a historical basis, the FTSE All-Share Index is yielding 3½% and the FTSE 100 is on 3¾%. These are both higher than the average yields over the past 20 years, and are particularly attractive when compared to the returns from bonds, credit or cash.”
Richard Stammers, investment strategist at European Wealth is also of the view that one shouldn’t necessarily be jumping into this market with one’s eyes closed.
“If you are in the market already, it is most likely too late to get out now. In that case, don’t panic and don’t try and get too clever. Really interrogate your long term strategy. If you are thinking of entering the market now, do so with your eyes wide open and importantly, know how much risk you can afford to take, how much risk you are taking and why you are taking it.”
