It is official: the FTSE 100 has entered a fully-fledged bear market.
Stocks saw one of their worst days in terms of performance for several years yesterday thanks to heightened concern about the continuing rout in the oil price and slowing global growth.
Chris Beauchamp, senior market analyst at IG said: “The main driver of the falls continues to be oil, which has pushed onwards to fresh lows, taking oil stocks with it. A fresh downgrade to IMF growth forecasts underlines what stock markets are telling investors – that things are looking gloomy across the board.”
Miners, asset managers and other commodity and financial firms led yesterday’s selling, carrying on a trend that has plagued markets for 10 months.
According to FE Analytics, the FTSE 100 has now fallen more than 20 per cent [in price terms which does not include dividends] since its last peak back in April 2015 when it reached an all-time high of 7,104 at market close.
Performance of index since 27 April 2015
Source: FE Analytics
This poses the question, much debated at FE Trustnet, of whether to try and capture the potential upside of a recovery or whether we are heading for another 20 per cent fall in the near term.
Rowan Dartington Signature’s Tim Cockerill thinks it is worth buying back into the equity market with about quarter of spare cash in your portfolio, but says it may be sage to wait for clarity on whether we have seen the last of the panic selling.
“If you are underweight equities in your portfolio then yes it may well be an opportune time to buy, perhaps not put all of your cash in now but 25 per cent and see how the next few weeks develop.”
Ben Willis, head of research at Whitechurch Securities agrees. However, he adds that while the market may look attractive from a valuation perspective, there is little clarity of whether this is the start of more falls.
“Of course, investing into the market at these levels is more attractive than a year ago or even a month ago. However, it is very hard to gauge or predict whether this is a bottom. The decline in the oil price and the effect this is having on the large oil constituents within the FTSE look likely to continue.”
Performance of index over 2yrs
Source: FE Analytics
Willis continues. “Concerns over the Chinese economy and its effect on commodity prices continues to weigh on miners. There is plenty of negative sentiment around and from a contrarian perspective, this is usually a good time to go back in.”
Due to this conundrum it may be better to buy back in slow increments, Willis adds.
“If you are looking to invest, I would drip feed money back in – a bit of pound cost averaging makes sense during times such as these.”
Paul Craig, manager of the Cirilium range of fund of funds at Old Mutual Global Investors [OMGI] which includes Old Mutual Cirilium Balanced, Old Mutual Cirilium Dynamic, Old Mutual Cirilium Moderate, Old Mutual Cirilium Strategic Income and Old Mutual Cirilium Conservative, thinks investors should be more looking to diversify away from core equity instead of buying back into the FTSE.
“It is easy to become highly emotional when faced with financial markets spiralling out of control, and throw away comments including, ‘Sell Everything’ grabbing the headlines,” Craig said.
However, he says 2016’s shaky start owing to fears of a US recession and a crash landing in China doesn’t feel new and instead gives more “a sense of déjà vu”.
“Is the beginning of 2016 really any different from the end of 2015? In fact, in the US, economic data have been relatively solid and remarkably consistent with what one would expect under current circumstances.”
“Where China is concerned, the transition away from an excessive export and investment orientation to a consumption-based growth model is already making progress, the service economy is growing faster than manufacturing. Perhaps if Chinese shares had not gone stratospheric in early 2015 we would not be taking such a cue from recent weakness.”
He also thinks it is the oil price rout that is spooking markets, but emphasises that it is more positive than negative.
“Leaving aside energy companies, there should be a very substantial positive economic shock from the collapse in the oil price for consumers in the developed world. I certainly welcome fears of a low oil price over fears of a high oil price.”
“Naturally, investors favour clarity, and with so many uncertainties around, it’s far from stress-free while trying to contemplate a suitable investment strategy.”
He says, however, for longer-term investors it is right to remain invested but warns that portfolio diversification is becoming more important than ever as we move later into the market cycle.
“What also comforts me, is hearing about the numerous investment opportunities from my underlying portfolio managers, not to mention, the attractive discounts to net asset value on many closed-end funds. “
“The result of the recent sell-off is that more opportunities are emerging to tempt those with a stronger disposition.”
He thinks in particular listed private equity looks attractive SVG Capital which is sitting on a 20 per cent discount as well as Murray International, which he says has a great manager in Bruce Stout and a decent current dividend yield of 6 per cent.
SVG Capital has lost money over 10 years due to significant falls during the financial crisis, but has been making strong gains since bottoming out in 2008 of more than 450 per cent. Murray International, meanwhile, has comfortably beaten its sector and benchmark since Stout took charge – despite its more than 30 per cent fall over the last two and a half years.
Performance of trust versus sector and index over 10yrs
Source: FE Analytics
Coram Asset Management’s Martin Gray meanwhile – who normally strikes a more bearish tone - thinks the market sell off has opened up an opportunity and has been actively buying UK value-style funds yesterday.
“It was Walter B Wriston (former CEO of Citicorp) who said “Capital goes where it's welcome and stays where it's well treated” and with that in mind we’re very comfortable buying true ‘value’ style on the way down.”
“Up until recently value as a theme hasn’t worked as it’s been offered at growth prices, but now it’s coming into range and is offering up much more attractive entry points.”
He and co-manager James Sullivan have been buying star manager Neil Woodford’s £8bn CF Woodford Equity Income fund which he says is partly attractive as it avoids some of the riskiest areas of the UK dividend-paying market.
“The headline yield on the FTSE is still an overcrowded trade – therefore we’d rather focus on lower yields that are sustainable and repeatable than a live fast die young approach.”
“With dividend pay-out ratios close to 100 per cent and dividend cover close to 1, it doesn’t leave much room for error.”