Though the outlook for equities has been more positive since the lows of March 2009, the FTSE 100 had its steepest drop in three months yesterday, and the FTSE Eurofirst 300 index suffered its worst one day decline since July.
But former head of multimanager at Gartmore and senior consultant at Insynergy Bambos Hambi said that the medium to long term investor should not be panicked by this decline.
“The catalyst for yesterday’s poor showing was fears of rising interest rates in China, doubts surrounding the second round of quantitative easing and of course the situation in Ireland and the effects this could have on the Eurozone.”
“With some markets having risen 20 per cent in recent months, it’s not surprising that short term investors are looking for a quick profit as soon as there’s fear in the market place.
“In that sense, the falls are exaggerated in real terms. Yesterday was simply a correction in the market. The day to day movements in the markets are very dependant on news flow. It’s been risk on risk off for a while now, but overall we are talking about a very flat range.”
Source: Financial Express Analytics
Managing director of KDW Financial Services Ken Wright, highlighted the danger of moving in and out of funds in a volatile climate: “Rule number one of investing is not to panic during day to day downturns. As long as you have made an investment in a good fund, you’ve got to put your trust in the manager, and hope they are prepared for downside risks."
Monica Tepes, fund research manager at Killik said that equities were still a better option than fixed income, as they allowed the investor to hedge against inflation; a growing concern in both developed and emerging markets.
“We have been talking about inflation in the developed world for quite a while now. We personally see it as the only way markets are able to work their way out of debt. Of course it is not ideal, but it’s certainly better than defaulting.”
“Anticipating this, we have hedged our stocks against inflation, Tesco being a prime example. Food retailers are able to pass on the rise of prices to consumers, and we like to invest in companies where running costs and wages can be kept relatively low, in order to maximise revenues. Despite some losses yesterday, gold has also worked out very well for us as well.”
“We don’t look at fund managers who only take on beta. Equities are a good inflation hedge as a whole, but it’s important to be selective in this environment.”
UK Head of Investment Strategy for HSBC Willem Sels said that the outlook for equities was still positive.
He said: “From a risk-return perspective, we think that the bonds/equities relationship has shifted. Debt has become less attractive in portfolios, while the case for equities is more encouraging.”
Sels added: “As inflation expectations rise, we are increasingly shifting away from fixed rate bonds to inflation-linked bonds, while recognising that inflation hedging is cheaper in equities, commodities and real estate than it is in safe haven bonds.”