On Friday morning, the FTSE 100 opened 0.5% lower after the Dow Jones index and S&P 500 slumped 4.2% and 3.8% respectively.
With the Dow Jones on track to suffer its worst weekly decline since 2008 and now down more than 10% from its peak on 26 January, the US markets have entered what is deemed official correction territory.
Miles Eakers, chief market analyst at Centtrip, said: “Global government debt yields continue to push higher as inflation fears mount, and with the stock markets in a state of correction, it’s expected that the Fed will tighten its monetary stimulus faster than was previously expected.
“But fundamentals remain strong and any tightening would be in response to healthy macro-economic conditions, which suggests global stock markets will start to shift upwards again.”
Meanwhile, Asian markets languished as Japan’s Nikkei 225 dropped 2.3%, China’s Shanghai Composite fell 4.1% and Hong Kong’s Hang Seng down 3.1%. European bourses also suffered turbulence with the French CAC 40 down 0.6% and the German Dax 30 by 0.4%.
However, despite these “dramatic” market selloffs, James Swanson, chief investment strategist at MFS Investment Management, said there are still opportunities.
He said: “These opportunities are apparent as long as the market is not signalling the risk of an impending recession. The markers of coming recession have increased, but not alarmingly so.
“The cycle is in its ninth year and the last recession has been forgotten by many, including much of Wall Street.
“But the next one does not appear to be looming. So there is an opportunity this winter to modestly extend stock holdings. But remember that late cycle is a time to focus on capital preservation, not wringing every last penny out of the market.”
Rising rates are a good thing
On Thursday, the Bank of England held interest rates at 0.5% but hinted at quickening the pace of further increases to bring inflation back in line with its 2% target. Following the news, sterling rallied but struggled to stay above $1.40 against the US dollar.
Yet, Rob James, financials analyst and manager of the Old Mutual Financials Contingent Capital fund argues that while markets around the world are “fretting over the move upwards in interest rates”, it is a good thing because it means the economy is stronger.
He explained that with the Bank of England having adopted a more hawkish tone this week, UK investors are increasingly pricing in a move to tighter policy.
“But should we be overly worried?,” he said. “Interest rates have been held down by the authorities for years due to the weakness of the global economy. The reason they are rising now is because the economy is stronger. It’s rather like a patient coming off the life support machine and breathing for himself. This is a good thing.
“Undoubtedly low rates have helped stimulate economic growth. But this sustained period of ‘easy money’ has also had some insidious effects and one of the victims has been the banks.
“As rates begin to normalise (and that’s what they are doing) bank margins should begin to recover. Higher margins mean higher profits and higher dividends. This is great news for investors. Of course, we will need to keep an eye on bad debts – higher loan prices will inevitably mean higher default levels, but this potential risk should not outweigh the benefits, as long as the increases in yields are steady, which we believe they will be.
“So, in our view, the banks represent an oasis of opportunity in a tumultuous market.”