Foreign & Colonial Investment Trust manager Jeremy Tigue says the current market climate reminds him of the build-up to the 1987 crash but, rather than focusing on the downside, he is anticipating a great buying opportunity.
He agrees with some doom merchants that a correction is imminent but he expects a short-term correction rather than a long downward trend and says investors should “start lacing up their buying boots” in anticipation of it because economic fundamentals remain strong.
In the short term, Tigue has reduced the £2.6bn trust’s gearing to its lowest level in seven years and focused its short-term borrowing in yen due to concerns about sterling weakness.
But he stresses he is poised to buy into any dips.
He says: “Stockmarkets are increasingly unsettled, with ever more erratic swings in share prices. Although there have been pockets of problems, predominantly from the slowdown in the US housing market, the world’s economic fundamentals are in good shape.
“There is a clear disconnect between market behaviour and the underlying economic picture. In this respect, 2007 is starting to feel very similar to 1987 when markets took a short, sharp hit, providing savvy investors with a breadth of opportunities.”
Called Black Monday, October 19, 1987 was the second-biggest one-day percentage decline in stock-market history, with markets in Hong Kong falling by 45.8 per cent, Australia by 41.8 per cent, the UK by 26.4 per cent, the US by 22.68 per cent and Canada by 22.5 per cent.
Despite the crash being 20 years ago, of the number of theories put forward, none have been credited with accurately pinpointing what the major cause of the downturn was.
Tigue says: “As with 1987, nothing sticks out as a cause for prolonged concerns but the cards are stacked towards a further correction.”
He says he has been moving the portfolio towards a more defensive position over the past few months.
He says: “I hope there is a further correction and the FTSE drops as low as 6,000 as there will be so many opportunities, a scenario that looks likely as the market seems somewhat mesmerised.”
Seven Investment Management director Justin Urquhart-Stewart points to the lengthy bull run since the market’s nadir on March 23, 2003. He says market consensus suggests the bull may have run its course and points to a record number of put options placed in New York and London, reflecting the widely held view that we could see a correction of between 5 per cent and 10 per cent.
Urquhart-Stewart says the sub-prime mortgage problems in the US and subsequent knock-on effects in the investment markets have already begun to trig-ger concerns.
He says: “We often seem to wait for some event to change the market. Well, I think we already have one. The two Bear Stearns hedge funds that have gone bust are such an alarm. These two structures invested largely in mortgage-backed securities and collateralised debt obligations, which merely repackage debt securities.
“One fund lost 91 per cent last week while the other lost the lot. Not only had the assets gone but the special protection scheme had also disappeared. As a result, the equity markets appeared spooked for a few hours but not frightened enough for those in denial of any problem to carry on as before.”
While the pressure on the US dollar has been well documented, Urquhart-Stewart also believes that the UK is set for a slowdown.
He says: “There is an expectation of an even higher level of interest rates in the UK, with the market pricing in levels as high as 6.25 per cent but the chances of significantly higher consumer costs leading to a lower spending capability put the chances of a retail lead recession in the UK potentially higher. Thus, maybe we can see the pound below the $2 level before the end of the year.”
Threadneedle head of global equities and manager of the global select fund Jeremy Podger says that while the past two correction were easily shrugged off as short-term sell-offs, the shock to the credit markets caused largely by the sub-prime crunch could be more difficult to shake off.
He says: “This had initially surfaced in the sub-prime mortgage market in the US, where the number of defaults has been on the increase, adding to concerns which already existed about the slowdown in the housing market and the impact it could have on consumer sentiment in the US – the US consumer accounts for 20 per cent of global consumption.
“However, the equity market had shrugged aside the sub-prime issue as a local concern and unlikely to spread contagion into the wider credit market. This optimism was dented slightly recently when Bear Stearns announced that two of its hedge funds were virtually worthless as a result of sub-prime investments.”
BestInvest head of communications Justin Modray says the prolonged bull run has made the stockmarket ultra-sensitive to changes.
He says: “Much seems down to sentiment as there is nothing fundamentally wrong with the market. The worry over the US sub-prime market has been mentioned but small changes have been exacerbated, as has been the case with the past two corrections.
“Personally, I think the market will end up flat at the end of 2007, with the FTSE ending up between 6,400 and 6,500.”
Nonetheless, Tigue remains confident that investors should be keeping their eyes open for bargains in the current volatile climate.
He says: “With global growth remaining strong, inflation under control and the emerging markets of India, China and Brazil showing impressive resilience in the face of recent stockmarket falls in the developed world, we are poised for opportunities to buy into the dips. After all, corporate profits remain robust and many companies have been raising their dividends.”