"We can certainly argue that equities are cheap," he said. "There aren’t many periods over the course of the last 20 years where equity valuations were as low as they are today."
"While equities are cheap, they are cheap for a good reason. I’m not expecting equity markets to go back to the prices we’ve seen earlier this year and I wouldn’t be surprised if we see some significant pressure at some point in the year. They could even push the lows we’ve seen this month," he added.
Performance of indices over 1-yr
Source: FE Analytics
Rossi, head of equities at Fidelity, believes that uncertainty caused by the extended period of volatility in capital markets could have an unusual long-term impact on equity investment, from a focus on growth to a focus on income.
"Three bear markets over 13 years are likely to have a significant impact on investors’ psychology," he explained.
"Markets have always worked on the promise of jam tomorrow but that has never really materialised for today’s investors. This means that people will increasingly look for jam today and markets will be expected to carry a little bit more weight."
"That is why dividends are justifiably high. This could change the face of equity markets as managers who have focussed on growth throughout their careers may now look increasingly for income."
Rossi also stresses that the volatility in equity markets is not simply a function of technical issues such as a greater amount of capital being used for short-term gains.
"What has driven down equity markets over the last month is principally fundamental in nature," he said.
"As the second quarter closed there was growing evidence that economic recovery in the developed world was slowing, and with that, even in the emerging world, money was tightening more than people had anticipated and the propensity for growth was diminishing."
According to Rossi, we will only see equity markets return to growth once there is a satisfactory resolution of the global debt hangover and developing markets can kick-start the world economy.
"Sovereign issues in the US and Europe haven’t been resolved. In countries like Italy, public debt levels as a proportion of GDP are still unsustainably high and that needs to be recognised. One can expect tightening in emerging markets to loosen over the next year or so, which could pave the way for much better equity market returns."