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Is this an equities bargain?

With a month still to go until St Leger Day, investors who are easily unnerved by short-term market fluctuations may wish they had followed the advice in the adage and sold up at the end of May and taken a relaxing break over the summer months.

The volatility that has plagued markets this year has been amplified in the last two weeks as fresh concerns over European sovereign debt and the US credit downgrade have seen wild daily swings in financial markets.

The closing value of the FTSE 100 at the end of May was 5,989 but since then, the FTSE is down by 16 per cent, hitting its lowest closing value for more than a year when it closed at 5,007 on August 10.

In just one day last week, the FTSE 100 fluctuated by over 7 per cent. On Tuesday, August 9, the FTSE fell from its starting value of 5,068 to a low of 4,791 in early trading before rallying to an intra-day high of 5,175 and then falling back slightly to finish at 5,164.

Threadneedle head of UK equities Simon Brazier says the volatility is due to the cumulative effect of concerns over the political mismanagement of US government debt, worries over the level of European sovereign debt and a slowdown in global financial growth.

Brazier says: “The speed and intensity of these developments have created a crisis in confidence in political leadership, which in turn has created a perfect storm of risk aversion with wholesale selling of ’risky’ asset such as equities and commodities and aggressive buying of ’riskless’ assets such as US government debt, the Swiss franc and gold.”

The fact these stimuli have come together in August when trading levels are lighter have exacerbated the market fluctuations but the fall in equity market values have seen several asset management groups state they are seeing good buying opportunities.

Merrill Lynch Wealth Management chief investment officer Bill O’Neill points out panic selling does not sit well in a long-term investment strategy.

He says: “While last week’s market reaction was substantial, current prices do appear to be discounting a considerable degree of bad news. Panic selling on the back of large falls is not usually a profitable strategy.”

Others, such as Fidelity International China special situations investment trust manager Anthony Bolton, say the economic data is not surprising and slow long-term growth is still on the cards.

He says: “I believe the recent stockmarket volatility reflects a familiar pattern during this bull market of short, but often very sharp, setbacks, within a bull trend. For some time, I have argued the outlook for the US and particularly Europe is for growth but well below normal growth rates.

“History shows that normally extreme equity market volatility as we are now experiencing should be seen as a time of opportunity rather than a time to become more defensive.”

With stockmarkets down by 11 per cent in the year to date, Brazier says many companies are now offering compelling value.

He says: “We are now left with what appears to be an astonishing valuation anomaly – the dividend yield on the UK market is now 3.7 per cent, 1.1 per cent higher than the UK 10-year gilt yield.”

Although the longer-term economic outlook remains poor, he says there are many opportunities: “We continue to focus on high quality, financially strong, well run companies that will thrive even in a lower-GDP world. Thankfully, there are many of this type of company out there and the aggressive sell-off of the past few weeks may well prove a compelling buying opportunity for those with longer-term investment horizons.”

Royal London Asset Management economist Ian Kernohan says the immediate outlook is for volatility to remain in the market but he agrees that longer-term opportunities are there for investors. Kernohan says: “In the short term, the situation is bound to remain volatile, although looking further out, our experience in markets suggest it is the relative valuations of assets which count in the long run and we are long-term investors. We note that, in contrast to 2008, money markets remain under no great stress while strong corporate balance sheets underpin dividends. We have a preference for equities over government debt in our asset allocation strategy.”

It seems that many retail investors who decided not to take the summer off are also seeing the volatility as a buying opportunity.

Alliance Trust Savings says it is also seeing much higher than expected activity among its execution-only customers through Sipp, Isa and direct dealing accounts, with many more investors buying into the market than selling up and moving to safety. Head of pensions Steve Latto says: “Many of our customers are showing confidence in the long-term value of equities despite current market volatility.”

Barclays Stockbrokers also reports it has seen higher than expected levels of trading from its execution-only clients as they seek to pick up investments as the price comes down.

Head of product Paul Inkster says: “Some investors continue to wait for events to unfold but many others are actively seeking investment opportunities, as shown by the majority weighting towards purchases.

“As is often the case in volatile markets, clients are also seeking out traditional safe havens, especially gold. Developed equities also continue to be a popular choice with clients, even as markets fluctuate hugely.”


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