Crash caused by computers, says Mentel

Computer-controlled trades were largely responsible for chaos on the equity markets last week, according to Lothar Mentel, chief investment officer at Octopus, who believes the picture is far more benign than it appears.

"The real problem at the moment is that all the people who do the thinking are on holiday," he said. "Technical sell orders are kicking in, where a computer has been told if X,Y, or Z happens, do this, and there’s nobody there thinking 'this is actually quite cheap' and buying up that stock."

Mentel cites a typical automated trade based on the 200-day moving average. "Once the current share price falls through this," he added, "the computer starts selling, and normally there will be a human being somewhere who’ll recognise that valuations are underpinned by earnings."

"They’ll see a stock is being sold too cheap and start buying."

Mentel believes the problem is exacerbated because thin trading volumes mean any large trade has an exaggerated impact.

"What really happened last week?" he said. "A 10 per cent market fall on the back of relatively little news that we saw last week is something that’s a lot more likely during the summer."

Private investors in particular must be careful not to overreact, he said, adding: "You must be careful not to draw the wrong conclusions from the current trading environment. We are not, under any circumstances, facing another 2008."

Mentel is positive on the outlook for equities in the medium-term. "The global economy is in good health, the banking sector is in good health and the problems we have are relatively easy to fix," he added.

Rob Gleeson, a spokesman for Trustnet's parent company FE, is also positive on the outlook, though like most he is uncertain about how long a recovery might take to arrive.

"Although economic conditions are challenging, I think the UK’s underlying fundamentals are not all that bad," he explained.

"The private sector reacted quickly to the credit crunch and although increases in production and job creation have been unsteady, they have at least shown good signs of recovery."

"The austerity measures being imposed by the Government are darkening the overall growth picture, but it is at least a firm course of action and seems to have instilled some confidence that Britain has a plan for dealing with its debt problems."

"Additionally the EU has a history of making sensible decisions only after having exhausted all other courses of action and being on the brink of disaster; that point is not too far away and should restore the market’s confidence that the current shambles is being dealt with properly."

"I expect the FTSE to recover quickly as confidence returns to the market, although this may yet be many months away."