This goes to show the impact of seasonality can be broken in the ‘brave new world’, as can historic precedents – something that will increasingly be put to the test in years to come.
We believe it’s best to keep focused on fundamentals and on the objective of one’s portfolio. Volatility will rise, as the market faces a number of headwinds, despite the undercurrent of momentum.
A correction therefore looks likely, and this could offer a buying opportunity, way ahead of St Leger’s Day (the historic racing day which falls on 11th, September, 2013).
Buy on dips
The market could experience some more strain over the next couple of months from the first quarter earnings’ season, presenting the chance to buy on dips.
Arguably, a mixed first quarter reporting season in the US is already forcing markets to take heed and refocus on balance sheets, margins of safety and other fundamentals.
Furthermore, we are seeing signs of weakness in certain key industrial chemicals, which are typically viewed as important indicators. This too makes us somewhat cautious, but not averse to select opportunities.
Japan has also caused some excitement in recent weeks but this may well dissipate as the market reassesses the situation.
UK equities at fair value
Investors have become very bullish on the back of recent moves by the Bank of Japan to stimulate the economy. While this is a positive step, and offers a palliative for sentiment in the developed world, we believe that any monetary measures must be supported by structural reform to Japan’s labour and financial markets.
Equities still offer better value than government bonds and investment grade bonds. Valuations in UK equities are looking fair value, but there are certain sectors, such as consumer discretionary and other cyclical areas, that are looking stretched and ripe for profit-taking.
We therefore prefer large cap stocks, with international exposure, that pay solid dividends, as the yield offers compensation for any rise in uncertainty and volatility. Furthermore, these stocks remain attractive versus pallid yields that investors are receiving on cash and some bonds.
