Recent reports suggesting 20,000 Russian troops are amassing on the Ukrainian border and news giant Fox failed in its attempted takeover over Time Warner have sent the S&P 500, FTSE 100 and MSCI Europe ex UK indices downwards.
While these dips are currently at modest levels, several analysts have warned the market is due an impending plunge of up to 15 per cent in the near term.
Financial markets have surprised many investors and fund managers in 2014 due their resilience in the face of ongoing threats that would usually lead to a sell-off.
From the Ukraine crisis to conflict in Gaza, tension has been high while the European recovery has been called into question after Portugal’s largest bank Banco Espirito Santo flagged concern it may need a bail-out.
Volatility has also been unusually subdued, having recently fallen to near historical lows.
FE Trustnet recently asked why, in the face of such uncertainty, the market wasn’t selling off.
Until recently volatility, as measured by the VIX index, had fallen more than 25 per cent, although it has started to nudge up, suggesting markets are becoming more nervous.
Performance of index in 2014
Source: FE Analytics
Here, FE Trustnet asks the experts if they think a significant correction is around the corner.
Max King (pictured), co-manager of the Investec Managed Growth and Investec Multi Asset Protector funds, says while markets have been tested the long term value of stocks is evident.“Markets do bounce around a bit but the important thing to note is that earnings forecasts are beginning to stabilise. In fact, forecasts are going up in some cases as markets are going down a bit. This means the forward P/E of the market is actually coming down; therefore there is little capacity to weaken further. That is not to say they can’t but there is little room to go down,” he explained.
“The fact that the earnings are good and the guidance is good means that the companies are optimistic - which means there is value in the market and that is all that matters really.”
King says there is still plenty of value left in markets, with valuations at the reasonable end of fair value.
“We have a lot of people looking around for things to go wrong [and] I think that is actually a sort of ‘contrarian positive’. In a real bull market people take a set back of a few per cent completely in their stride and the fact that people worry about it is actually quite positive.”
“If you look around we find there is a lot of value out there even though a lot of people are moaning. There are not a lot of fantastically cheap things but there is a lot of decent long-term value.”
Capital Spreads’ William Nicholls notes that the market has been selling off but further falls have been buffered by investors buying up stocks, in the search for bargains.
“The flash sell-off over the last week was the culmination of the world’s financial and geo-political issues all exploding simultaneously. The Argentinean default, the attacks in Gaza, Italy back in recession, poor eurozone data, and most recently the advance of troops in Ukraine, caused a huge panic,” he said.
According to FE Analytics, the MSCI Europe ex UK is down 3.23 per cent over the past week while the S&P 500 and the FTSE All Share are all down 2.07 and 1.86 per cent, respectively.
Performance of indices over 1 week
Source: FE Analytics
Chris Beauchamp, market analyst for IG, says the FTSE is yielding to a prevailing bearish sentiment due to fears of further escalation between Russia and Ukraine and failed mergers in the US.
“Yet again the August malaise is afflicting global equity markets, but with the losses not yet approaching a full correction there seems every likelihood that more downside is in store,” he said.
“With earnings still holding up and the US economy moving ahead it is only likely to be a temporary sell-off, but investors should be ready to maintain their grim determination throughout the rest of the month.”
Beauchamp says the conditions still seem to point towards more pain for equity investors and that Ukraine will continue to be the big worry, especially if the US comments publicly on Russian troop movements.
Paul Warner (pictured), managing director of Minerva Fund Managers, says the market is at risk of a large correction of 10-15 per cent in the autumn when quantitative easing ceases, unless there is a smaller correction in in the shorter term.“I have increased my cash weighting to 11 per cent because I think the Ukraine situation is being ignored by the market. With the shooting down of the Malaysian Airlines plane has been brought back to the attention of investors,” he added.
“Also, as growth came in above expectations in the US, markets have got the worry the Fed might be behind the curve and if it doesn’t put up interest rates markets will do it for them by putting up yields at the long end, if they start worrying about inflation coming through.”
