In what most see as a capitulation point over global worries that China is facing a hard landing from super high to much slower economic growth, equity markets had their single worst session yesterday since the financial crisis.
For global stock markets this carried on a downward trend since the end of April in which the likes of the MSCI Emerging Markets was the worst performer of all the major indices with a loss of 30 per cent but other key market such as UK and Europe have also plunged more than 15 per cent.
Performance of indices since April
Source: FE Analytics
For Mark Dampier (pictured), head of research at Hargreaves Lansdown, investors should expect more weakness to come but also a buying opportunity.
Dampier is looking to increase his exposure to the CF Woodford Equity Income fund while markets are down as he thinks a key takeaway from the sell-off is that capital appreciation is unlikely but income will still be in high demand to investors.
“I have been sitting thinking each day about buying it and each day it has fallen further and I have just sat back and thought I should wait. I don't need to try and catch a falling knife. I have got quite a big holding in Neil anyway so I can afford to take my time. I might do some this week, but I just don't know yet,” he said.
“For me I am looking to buy income more than anything else because I am an older person and will retire eventually and I like dividends. Capital growth is pretty uncertain but income is usually fairly steady and I think you have to have conviction in the fund managers you think are good and when times are bad you should be buying.”
Over past three weeks, the £6.7bn fund has had its largest drawdown since it was launched in June 2014. According to FE Analytics, it has lost 7.84 per cent, more than the IA UK Equity Income sector average but less than FTSE All Share’s 11.74 per cent tumble.
Performance of fund, sector and index since 6 August 2015
Source: FE Analytics
CF Woodford UK Equity Income is a diversified portfolio of just under 100 stocks, with its top 10 geared towards mega caps such as AstraZeneca and Imperial Tobacco, which have been hit harder than the small caps that make up the back end of the portfolio.
Dampier said: “If I can buy at 10-15 per cent lower, then shouldn't I be considering doing that? That's what I am doing right now. It is not going to go slam, bam up to 7000 points any time soon and so I think I have time on my hands and August is notoriously thin market anyway so that has not helped.”
Woodford warned back in July that he fast saw the global macroeconomic moving to a more fragile state and broadly unsupportive of equity markets because of the Greek political impasse and the concerns surrounding China.
However he said the China situation looked worse for the global economy and more important than Greece because it weakened the government’s plan to convert China’s economic model from an export-led economy to a consumer-led one.
“It has the potential to shatter consumer confidence. Too many people have been sucked into a casino market. They borrowed money at the margin … and everything looks good when it is going up rapidly. When the bubble bursts it is very frustrating,” Woodford explained back in July.
“It looks initially like a market contained event but quite quickly it can spill over in to the real economy. This is what we think may well happen. The political risk that overlays now only contributes to that cautious view.”
However, while Dampier thinks markets will be pretty bumpy for the next few days, “it is probably not a bad time to buy” as he says fears of a cataclysmic time for equity income stocks that Woodford tends to favour are vastly overblown.
“It is a painful adjustment with the Chinese currency [potentially] falling further and therefore in a low growth environment with low inflation going back out to the UK and US you get high valuations and low growth. On the other hand we are going to see huge falls in the commodities that people use - particularly oil.”
“We [the team at Hargreaves Lansdown] think about $6bn a day worth of extra money is going to come back to consumers. As long as you’re not in Saudi Arabia, for those that consume like the UK and Japan that is quite good news. Even though wages are not going up a lot I can see things getting cheaper which is good. The market is now just deciding to concentrate on all the bad things.”
“The talk a few weeks ago was on US interest rates and I thought there was a chance of them going up in September and I don’t see them going up any time soon. The consequence is that interest rates will stay lower for longer. If they don’t the central banks will have made a policy mistake so we need to get over that balance.”
However, he thinks there is little chance of strongly rising markets with more subdued markets for several years thanks to slowing Chinese growth.
“It is just part of the old crisis. We are only about midway through. Now it is just manifesting itself in a disinflationary wave. Interest rates are now going to stay lower for longer than people ever imagined.”
“When you get thin markets in the summer you getter bigger market moves but the sell-off is a reflection of too much global supply and not enough demand which is what I call the long middle.”
“The slowdown was already happening in China. I am not actually that bearish but everyone else is. The market has been made worse by interference of the government and they would have far better to let it have found a natural level by itself in the first place.”
CF Woodford Equity Income is still top of the IA UK Equity Income sector since launch last year with a return of 13.17 per cent. Only a quarter of funds are in positive territory over this period.
Performance of fund, sector and index since launch
Source: FE Analytics
CF Woodford UK Equity Income yields 4 per cent and its clean ongoing charges figure [OCF] is 0.75 per cent.