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The FTSE recovers its losses – What can investors learn from this week?

28 August 2015

It’s been a rollercoaster ride for investors this week, but with the FTSE now back to the 6,200 level, FE Trustnet asks what investors can take from the past five days.

By Alex Paget,

News Editor, FE Trustnet

August tends to be a quieter month for markets, but that has far from been the case over the past week.

The significant falls of ‘Black Monday’, which was one of the FTSE 100’s worst days since the financial crisis, and Wednesday’s ‘wobble’ made way for Thursday’s phenomenal rally, which ranks in the top 50 days ever for the UK’s blue-chip index.

While trading this morning has been equally as volatile (with a strong start followed by another fall), it means the FTSE 100 closed yesterday 0.9 per cent higher than it started the week.

Of course, the events of the past five or so days have been part of a longer term downward trend. Issues such the Greek debt negotiations, falling commodity prices, spikes in government bond yields, China’s plummeting equity market and, more recently, the devaluation of the yuan all mean the FTSE is down 11 per cent since its peak in April.

Performance of the FTSE 100 since 27 April 27

 

Source: FE Analytics

Nevertheless, the way in which the events of ‘Black Monday’ were portrayed in the press (us included) was that the end of the world was nigh – and yet investors would have made money if they bought a UK tracker on Tuesday morning.

Speaking about yesterday’s 3.7 per cent rebound, Hargreaves Lansdown senior analyst Laith Khalaf says the experiences over the last few days highlight that long-term investors are wrong to react to short-term news.

“It’s been one of the best ever days for the UK stock market, neatly illustrating why it’s a bad idea to sell out in a market rout,” Khalaf said.

“Black Monday was a truly dreadful day for stock investors, but it’s been followed by big bounce, with the FTSE now back where it ended last week. Markets tend to overreact to both good and bad news, so sharp falls are often followed by strong rallies.”

“It would be foolhardy to suggest we’re out of the woods yet though and share prices are likely to remain volatile for some time. When markets are behaving erratically, investors should sit on their hands, and stick their fingers in their ears as well if they can.”

Investors, of course, should be cognisant of the fact that the outlook for risk assets still looks uncertain.

There is still a huge amount of debt in the system, China still faces the unenviable task of changing its economic model without severely damaging growth or creating unemployment, deflation is still a real threat and, at the same time, the US Federal Reserve may still hike interest rates next month.


 

Therefore, this isn’t the type of article where we question, “What was all the fuss about?” Far from it, as we all know trying to predict short-term movements in markets is a mug’s game.

However, what has happened over the past five days or so further solidifies the argument that investors shouldn’t panic sell within their portfolios on the back of short-term market movements.

In fact, while the past is no guide to the future, history has shown that long-term investors have benefitted from gently dipping their toes back into the market when others are most fearful.

One of the best examples was on Monday 15 September when Lehman Brothers filed for bankruptcy. The FTSE 100 fell some 5 per cent within two days and led to one of the worst financial crisis since the 1920s.

Markets didn’t bottom for another five or so months either, as the graph below shows, so investors will certainly have been forgiven for feeling a tad panicky.

Performance of indices between September 2008 and March 2009 

 

Source: FE Analytics

While upcoming events are unlikely to be as disastrous as they were during late 2008/early 2009, most experts are preparing for a high level of volatility along with further falls over the coming months – so there are comparisons which can be drawn between today and this time seven years ago.

Certainly, the likes of FE Alpha Manager Charles L. Heenan told FE Trustnet that it is the type of market investors want to be “dribbling money into”, rather than jumping into.

Nevertheless, FE data shows that if investors had bought into certain higher risk funds the day after Lehman Brothers collapsed, they would have since seen a return of more than 400 per cent in some instances over the years since.  

The best two best performing funds over that time, for example, have been Candriam Equities Biotechnology and AXA Framlington Biotech which have gained 441.65 per cent and 330.68 per cent, respectively.

They are joined by a raft of UK small-cap orientated funds, like Fidelity UK Smaller Companies and Unicorn UK Income, as well as Legg Mason Japan Equity and First State Indian Subcontinent which all returned more than 200 per cent.

That’s not to say investors enjoyed a smooth upward ride, of course.

The likes of R&M UK Equity Smaller Companies and Schroder UK Dynamic Smaller Companies (which have been the ninth and tenth best performing open-ended funds since the Lehman Brothers collapsed) went on to lose 38 per cent and 30 per cent, respectively, until markets eventually began to recover in March 2009.


 

While it means that investors would have seen a higher return if they had bought any of those 10 funds on 3 March 2009 (in fact some are up 200 percentage points more) when the market eventually bottomed, the chances are correctly timing an entry exactly are very low.

 

Source: FE Analytics

Ben Preston, director at Orbis Investment Advisory, says that events of the past week again suggest that now might be a good time to tread carefully back into the market.

“The best time to buy in the US and Europe was during the global financial crisis, when others were selling at any price they could get. The market often rewards those who can hold tight when others panic and run for the exits,” Preston said.

“Paying too much for an asset is the greatest risk investors face. The way to lose money on the stock market is to overpay for shares. It’s counter-intuitive, but investing is riskiest when share prices are high and the economy is strong: often just when it feels safest.”

“When market turmoil allows you to purchase a high-quality business below its fair value, long term risk is reduced.”

The 10 aforementioned funds have, of course, been the best performing open-ended funds out there since the crisis and therefore don’t reflect the outcome of the all markets. In fact, the likes of MFM Junior Oils and Guinness Alternative Energy are down more than 50 per cent since September 2008.

Those losses have been gradual though, and not a result of one significant fall.

Nevertheless, taking everything into account, deVere Group’s Nigel Green say there are a number of lessons investors can learn from the past week.

Providing they are in high quality funds run using a strategy they understand and believe in, Green says the events of the last five days (and other significant sell-offs in markets) suggest investors should do nothing but keep calm and focus on their long-term goals.

“It is often said that the key to investment success is to buy low and sell high. The only problem with that theory is that trying to accurately time the weakest point in the cycle is impossible,” Green said.

“As such, it is best to just feed the money in over time in a measured way in order to take advantage of the long-term trend of stock markets to deliver long-term capital growth. History teaches us that panic-selling in stock market crashes can be potentially financially disastrous for investors.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.