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Don't panic! Investors urged to cling on as shares fall
Markets have endured a woeful start to the year, but this is not the time to bail out, say experts.
by Daniel Grote on Jan 18, 2016 at 15:47
Investors have been urged not to panic as markets endure a woeful start to the new year, with fears over China's slowing economic growth once again rearing their head.
The FTSE 100 has fallen by 7% so far this year, and is 18% down on its most recent high above the 7,000 mark, set in April last year. The UK blue-chip index's trajectory matches that of most major global stock markets this year, and the 'Vix', a measure of volatility known as the 'fear index', is back at elevated levels not seen since last summer's market turmoil.
Investors have been shaken by fresh fears over a China slowdown, exacerbated by currency devaluations and wild stock market movements in the world's fastest-growing economy. The plummeting oil price, as the lifting of sanctions against Iran looks set to herald a further flood of crude into an already over-supplied market, has added to the bearishness.
Against this backdrop, Royal Bank of Scotland has issued a dire warning to clients, urging them to 'sell everything' ahead of what they claim will be 'cataclysmic' year for markets.
But Tom Stevenson of Fidelity Personal Investing argued it was crucial for investors not to lose their nerve as markets fall into the red. 'We should remember that volatility is the price you pay for the long-term outperformance of equities over other asset classes,' he said.
'It is also worth remembering that staying fully invested through market cycles makes sense because missing even a handful of the best days in the market can seriously compromise your long-term returns. The best days in the market invariably follow close behind the worst ones – time in the market matters more than timing the market.'
Nick Dixon, investment director at Aegon UK, suggested investors could view the market sell-off as a form of 'January sales' for shares.
'Just like the January sales, it's possible to buy an item that was full price before Christmas, at a significant discount,' he said. 'The only difference to the world of retail is that in most cases the investments you're buying should rise in value over the long term.'
Adrian Lowcock, head of investing at AXA Wealth, added that investors who bailed out of shares now could be 'selling after the event'. 'Trying to time markets can be very damaging to your wealth, it is better to focus on topping up investments at low prices,' he said.
'It is difficult to predict where markets will go in the short term and where the bottom of any sell-off is until after the event,' he added. 'Drip feeding allows investors to add to their portfolio should markets fall further.'
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said that for pension investors, the market volatility highlighted the need to keep cash reserves, and not rely on share sales for income.
'Drawing the dividends from a well-diversified portfolio as income is a more stable and certain way of providing a retirement income from shares, ' he said. 'In the short term, if you were planning on cashing in shares in the immediate future it may make sense to defer doing so if you can, however there is no guarantee over when or how quickly share prices may recover.'
Opportunities to buy
Mark Wharrier, manager of the BlackRock UK Income fund and BlackRock Income and Growth (BRIG ) investment trust, argued that the recent market volatility presented an opportunity to invest in companies whose shares have been hit but whose business remains sound.
'Every company will enjoy good times and endure difficult times, but the market's first instinct on a rogue first quarter's newsflow is typically to assume the worst, rather than looking at whether the fundamentals of a business remains intact,' he said.
'Is growth going to be higher than the market expects? if so, any short-term weakness in the share price is an opportunity. It can take time for this stronger growth to be reflected in the share price, but we can be patient.'
Trevor Greetham, head of multi-asset at Royal London Asset Management, also believes now could be a good time to buy shares. He pointed to the group's 'composite sentiment indicator', which has reached levels of bearishness not seen since last summer's sell-off. Typically, spikes in depressed sentiment are followed by rallying markets.
'Things could get worse before they get better but our analysis suggests that such a state of panic creates a good opportunity to buy stocks,' he said.
Paradoxically, investors' heightened nerves could be just the sign that things aren't quite as bad as they seem, argued Guy Stephens, managing director of wealth managers Rowan Dartington.
'History teaches us that most disastrous economic scenarios are unpredictable and the time to spot them is when the skies are blue and the sun is shining, markets are high, volatility is low and all looks set fair,' he said. 'This is at odds with the current environment when most are looking for reasons to support their bearish stance.'
Is China really that bad?
James Dowey, chief economist at Neptune Investment Management, argued the market's reactions to China's troubles since the start of the year had been 'over the top'.
He argued that investors were wrongly viewing China's devaluations of its yuan currency as a symptom of a government that had 'simply lost control, with currency weakness being a manifestation of the demise', rather than a response to the strength of the dollar.
While a weaker yuan would also hit China's trade partners, he said the scale of the global sell-off ignored the fears over China's slowing growth that had already been priced into emerging markets. 'With emerging markets equities at one of their cheapest-ever levels in history, it is not as though the market is in need of a reality check on emerging markets,' he said.
Craig Botham, emerging markets economist at Schroders, also focused on China's currency devaluations as the key issue for global markets. China's stock market volatility was not a sign of economic weakness but of the fear that had been generated by the imminent expiry of a ban on share sales by large investors and the failing of the country's 'circuit breaker' trading suspension mechanism.
Recent economic data for the country, although weak, meanwhile did not deserve too much weight, 'particularly given the pollution-related shutdowns which likely weigh on manufacturing activity'.
The Chinese authorities' consistent devaluations of its yuan were more significant, he argued, in their potential to export deflation into other areas of the world, particularly emerging markets.
He said his 'base case' was that these devaluations were merely aimed at maintaining a stable exchange rate. But a more dangerous devaluation, motivated by the Chinese authorities' fears over growth or deflation, was a 'definite risk'.
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