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| Market Data - 5:30PM UK | |||
|---|---|---|---|
| FTSE 100 | 5267.62 | -70.76 | -1.33% |
| FTSE 250 | 10431.90 | -161.04 | -1.52% |
| Dax 30 | 6271.22 | -37.74 | -0.6% |
| Nasdaq | 2778.79 | -34.90 | -1.24% |
| EuroStoxx 50 | 2144.69 | -2.22 | -0.1% |
| Data delayed by at least 15 minutes | |||
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Market Volatility - August 2011
Investment Dilemma – August 2011 – Our Thoughts
Global investment markets have been volatile of late with many predicting “Armageddon” due to debt deleveraging and even rioting on the streets of UK cities!
We believe a simple Q&A format would be best suited to highlight the situation, answer the key questions and provide reassurance to our clients.
Q. What is causing current volatility?
Primarily uncertainty over the European peripheral debt situation with the markets turning their attention to Italy and Spain. Whilst the "bailouts" of Greece, Ireland and Portugal are manageable, the Italian and Spanish markets are much bigger and are more difficult to bail out. Any default by either of these economies would be difficult for the EU to deal with. In addition, a number of weak economic data points from the US along with continued dithering over the US debt ceiling and consequent high-profile downgrade by the ratings agency, S&P, has caused fears of a global growth slowdown.
On the other hand, Moody's has maintained its AAA credit rating for the US and the US does now have the increased debt ceiling it requires. Whether US politicians have the stomach for the fiscal restraint which is going to be needed for a very long time is a different matter.
This uncertainty is what investment markets do not like.
Q. How is it being addressed?
European politicians have sanctioned the direct purchase of Italian and Spanish government bonds with the aim of reducing the borrowing costs for this economy. This has had a positive initial impact on those bond yields. The ratings downgrade in the US has had very little direct impact on markets but has added to the level of "fear" present. There is renewed talk that the US Federal Reserve will embark on further quantitative easing to jump-start the flagging economy, which will be broadly positive for risky assets.
Q. What are the short term implications?
Markets remain volatile with some big intra-day moves in equity indices. Much of this has been caused by fund managers dramatically cutting risk levels in portfolios and the wide use of "shorting". We see this continuing over the coming days but believe that volatility will begin to fall in the coming weeks.
This intranet day volatility highlights the uncertainty markets have over the current situation. The realisation that debt incurred primarily by Western Economies will have to be repaid is resulting in a lowering of economic growth expectations with the likelihood of slower western economic growth rates becoming the norm compared to historical rates.
Q. What is the advice to clients?
Successful medium to long term investment is about maintaining a diversified portfolio through the use of different asset classes. Whilst this will not provide complete immunity from the sort of market reactions we have seen recently, it does provide some measure of protection. During 2010 and 2011 we have maintained a drip feed purchase strategy for main market equities and have sought to generally avoid both US and European stock markets.
This drip feed approach has been implemented because we felt markets would be volatile and has proved to be the correct strategy.
In the very short term, and by this we are talking about probably days, we are cautious about committing further lump sum investments to markets for all but the most adventurous of investors. For regular savers we continue to recommend the continues implementation of any agreed strategies.
Q. Is this an investment opportunity?
It is only with hindsight that anyone will be able to tell at what level a market was at a short term low providing the best entry point. Across the investment profession many hours of research and analysis goes into trying to identify this 'inflection' points. This research is generally seen as being not very successful and where it is seen to 'work' it tends to be more luck than judgement.
Thus, whilst buying equities now compared to two weeks ago does look attractive the reality on a medium to long term view (5 to 10 years) which is where investors should be looking, the short term entry point is largely irrelevant.
With markets so uncertain about their future direction we would recommend a wait and see strategy for new monies for the time being.
