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Market correction brings welcome reassessment of risk

The bull market of the last four years has lulled investors into accepting more risk for lower returns, that’s according to William De Broe fund manager and head of fund research Dan Kemp.

Kemp says the lack of volatility has been compounded by low borrowing.

He says: “This phenomenon has been common to all asset types and has resulted in frothy prices at the risky end of most asset classes. Evidence of this is myriad, but the best examples are smaller company shares, high yield bonds, emerging markets equities, sub prime property and the notorious ‘carry trade’.”

While some industry spectators have sighted a plethora of reasons that have acted as a catalyst for the fall. Kemp says it has been a mixture of all of these events meeting at the same time.

He says: “While numerous column inches are filled attributing the blame for the fall to various factors; from tightening legislation in China to a slow down in the US economy and even a reversal in fortunes of the Yen, we are more intrigued by the confluence of these movements.”

Kemp says that while this volatility is both overdue and welcome, there are potential consequences such as investors dropping an ‘all risk is good’ attitude and a change in market leadership likely to come in tow.

As for any potential recovery, Kemp says: ““Unlike last year, we believe that the recovery from the current falls will not be lead by higher risk assets, but instead by good value large cap stocks in the US and Europe. While these stocks are already beginning to look ‘oversold’, it appears a little too early to commit further capital to equity markets in general, due to another unusual feature of the past week, which is the dominance of derivatives over the ‘cash’ or real asset markets.

“From the short term perspective, good stock selection in large index constituents can be subsumed by market movements as hedge funds use futures to push the index. However, this mispricing cannot persevere over the long term and thus the current market provides excellent opportunities for genuine ‘stock-pickers’ to go bargain hunting amongst the ashes of last week’s conflagration.”

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