View more on these topics

Investment View: Ride the shockwave

I was on holiday when the first shockwave hit the markets last week.

Watching events unfurl on the business channels with my sun-kissed balcony but a few paces away was a somewhat unreal experience. Yet it gave me a degree of perspective which I might not have enjoyed if I had been present on a dealing floor.

The journey home gave me the chance to reflect on what might be going on. This proved valuable as I stood in a TV studio shortly after the US inflation figures were announced. In half an hour, the FTSE 100 lost more than 100 points, delivering a fall that day of nearly 3 per cent, a performance that was replicated in the other major European bourses. In the US, trading had to be suspended briefly because of the sheer weight of selling orders.

But what had changed? The answer was very little. The apparent trigger for the sell-off on Wednesday was the 0.6 per cent rise in the US cost of living index. But wasn’t that broadly in line with expectations? Higher energy costs were always likely to translate into a rise in inflation. The only real surprise was that other costs, notably food and housing, had also risen.

So US interest rates seem set to rise again. That is no surprise either. Federal Reserve chairman Ben Bernanke has already indicated as much. But investors took fright and shares took a tumble. Is now a good opportunity to pick up a bargain or two? Before you rush to the phone to place those buying orders, there are a few things to consider. First, volatility has returned to markets. Share prices are swinging around more than they have done for over three years on both sides of the Atlantic. What this means to investors is that buying and selling have become trickier manoeuvres to exercise than has been the case recently.

Second, the seemingly limitless supply of cheap liquidity may be running out. The way in which some investors were diving for cover as trading conditions became tougher indicates that there has been a degree of gearing around. That seems particularly true of commodities, where fears exist that some traders will be unable to comply with the stricter conditions on margin calls that are being applied to reflect the current level of volatility.

Derisking portfolios is sensible at a time when more than a little froth is present in markets. The riskier assets have enjoyed the greatest buoyancy in this bull market and will undoubtedly bear the brunt of any retrenchment although you can be reasonably certain that the market will be as indiscriminate as ever in the punishment it dishes out.

There is no reason to believe that the bull run is over but it is worth remembering that investment is never without risk. On balance, I consider this shake-out to have provided welcome respite to markets that were starting to look overheated. Buying opportunities will be thrown up but more than the usual care needs to be exercised. It is still too early to go back into more volatile areas such as emerging markets but in some places, such as here in the UK, real value is emerging.

Recommended

Trigger points

The Pensions Regulator head of strategy John Ashcroft explains the filter system that will be used to regulate defined-benefit scheme funding

Close breaks new ground

Close Fund Management has brought out a special situations fund that differs from similar funds through its focus on UK smaller companies.

Policing policy

Back in the mists of time, the original proposals for mortgage regulation envisaged lenders taking responsibility for brokers – a paper called CP98.

Online key to reducing rejected critical claims

Online underwriting is the key to reducing the number of critical-illness cover claims rejected for non-disclosure, accor-ding to Direct Life & Pensions. The Financial Ombudsman Service’s recently said that in many cases of non-disclosure on application forms for protection products, it was found that clients had disclosed information to their advisers but the information was […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com