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Volatility opens up a valuation gap

Early gains last week in the FTSE 100 were dampened by fears of an American recession.

The Aggressive, Balanced and Cautious Adviser Fund Indices all rose as London’s leading share index crossed back over 6,000. Stocks were buoyed by increasing activity in large scale mergers and acquisitions.

Having dropped 12.17 per cent in the first three weeks of trading in 2008, the Aggressive index recovered 1.81 per cent at the beginning of the week, tracking the FTSE rally. The Cautious and Balanced indices also followed the market, with gains of 0.72 per cent and 1.24 per cent respectively.

The upward trend was abruptly reversed on Tuesday after poor January services sector figures reignited fears that the slowdown in the US economy is pushing the country into a recession.

The AFI panellists say there are no signs of a reduction of volatility in the market for the first two quarters.

Jonathan Wallis, head of retail fund research at Allenbridge Group, says investors are unlikely to change course from their preference for cautious managed funds just yet.

“We found that clients have not been panicking but we have not seen any reduction in risk aversion,” says Wallis. “We are not expecting any immediate recovery in the market as we probably will not see signs of stabilising until the second half of the year.”

In the current climate, Brian Dennehy, managing director at Dennehy Weller, says it is important not to be swayed by short-term events in the markets.

“The horrible start to 2008 for world stockmarkets generated wall-to-wall hysterical media reporting by the week beginning January 21,” says Dennehy. “Yet, by the end of that week, the FTSE 100 index was down by just 31 points.”

The continuing volatility and the wholesale selling of stocks is beginning to throw up some potential value for the discerning investor.

“I think that there is value on a selective basis,” says Wallis. “Good stocks have been sold off indiscriminately but I do not expect them to realise their potential for a month or two.”

The greater need for selectivity was demonstrated by the net reduction of 13 funds from across the AFI benchmarks during the November rebalancing as the panellists increased their weightings in core stocks and reduced their exposure to British property.

Peter Hicks, head of IFA channel at Fidelity, says greater selectivity is a core theme of fund manager Tom Ewing’s investment strategy to improve the Fidelity UK growth fund’s performance since he took over at the beginning of December.

“Tom has cut down the number of stocks in the portfolio,” says Hicks. “The volatility in the markets has opened up valuation differentials between similar stocks and he is looking to take advantage of that.”

“In terms of the p/e ratio, this is going to be the year of the E,” he says.


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