The best thing investors can do at the moment is nothing at all, according to Fidelity’s Dominic Rossi (pictured). 
The global chief investment officer describes the mass sell-off experienced throughout markets across the world yesterday as “the third wave of deflation”, and argues that the emerging markets bull run between 2002 and 2007 has now completely been wiped away.
He adds that the bull market now revolves around developed markets and innovative sectors such as healthcare and technology, but he still urges investors to hold off of buying into anything at the moment because of cheap valuations.
“The old adage of catching a falling knife is apt here,” Rossi (pictured) said.
“I can’t tell you how many times I’ve been through one of these. Early on in my career I tried to catch the falling knife and learned that’s probably not the way to go.”
“The best thing to do at the moment is to do nothing and to just let the volatility subside as it will do. Anything you try and do now will almost certainly be wrong. My suggestion to investors is to do very, very little.”
The manager adds that, before markets recover, investors need to consider the low nominal growth environment and that price pressures could continue to push downwards.
As such, he recommends looking into sectors that are developing new and innovative products.
“If there is the opportunity when markets settle down to pick up your favourite stock, and this is what I’m discussing at the moment, you should be doing that on a very selective basis,” he warned.
“In a humdrum nominal growth environment which is now certainly going to persist, the only way to escape that environment is through investing in innovation.”
“At the moment, with markets falling, correlations always rise, as we know as investors, and everything gets chucked out. But the leadership of this market when we recover will be US equities and innovation in healthcare and technology – a message we have been sending out for the last two to three years.”
While Rossi believes that the current situation will “flush itself out” over the next one to two years, he says that it’s not wise to rush into an investment because it is cheap, nor is it wise to invest everything you have while everything is at a low price.
“When you’re in these situations, you should never just take 100 per cent and go all in,” he continued.
“The way you enter these treacherous markets is very gradually. It takes several months for a market to stabilise and bottom out after one of these sharp corrections, and you should give yourself several months to reposition your portfolio.”
Reactions to the FTSE free-falling 4.7 per cent yesterday and losing a total of £74bn by the close of play resulted in mixed reactions from financial experts.
Performance of FTSE 100 in 2015
Source: FE Analytics
Hargreaves Lansdown’s Mark Dampier told FE Trustnet this morning that investors should expect the markets to remain weak but they should also view this as a buying opportunity.
As such, he is hoping to increase his exposure to the CF Woodford Equity Income fund while valuations are cheap.
“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. According to FE Analytics, CF Woodford Equity Income has lost 7.84 per cent over Black Monday, which is more than the IA UK Equity Income sector average but less than FTSE All Share’s 11.74 per cent drop.
Many financial experts are urging investors not to panic, and Rossi expects the downwards draft in equities will cease before the end of the year.
What is still unnerving many investors, however, is the exact cause of the huge sell-off around the globe, which also caused the largest US stock market sell-off in four years, and led to Europe’s worst trading day since 2011.
The growth slowdown in China has caused a wave of unease across the markets, which was intensified when the Shanghai Composite index began to plummet in June after making a stellar return of more than 53 per cent during the first half of the year.
Performance of index in 2015
Source: FE Analytics
In addition to this, more and more investors have been speculating about when the Federal Reserve will hike interest rates, which could severely bruise US exports as well as emerging markets with high levels of dollar-denominated debt.
Some financial experts have predicted that rates will rise in September, as the Fed’s next policy meeting will be held then. However, Rossi doesn’t think these concerns contributed to the FTSE’s fall on Black Monday.
“I would phrase what is going on as the third wave of deflation,” Rossi said.
“What I mean is that the first wave of deflation was obviously the US-led housing and financial crisis of 2008 and 2009, the second wave of deflation was the Eurozone crisis of 2011 and 2012, and this third wave of deflation is a fairly classic emerging markets crisis.”
“For those who were around 20 years ago when the emerging markets crisis truly erupted in 1997, you will notice the hallmarks are very similar in that, as always with emerging market crises, they start in the foreign exchange markets and, as this one has done, it’s been rolling its way through currency after currency.”
Performance of funds during Asian financial crisis
Source: FE Analytics
He adds that the most recent fall was then triggered by China’s decision to devalue its currency which impacted commodities, and this has now worked its way from commodity markets into equity markets and will ultimately affect the real economy.
“This crisis, and it is a crisis in emerging markets, has many of the hallmarks of previous episodes and, as we’ve learned previously, it takes its toll on real growth,” Rossi explained.
“We will see the IMF and other international organisations cutting their forecast for growth rates for emerging markets going forward. The outlook for the emerging world will remain very, very challenged.”
