Investors should be wary of selling stocks in the current market correction in the hope of picking them up at cheaper valuations as trying to time the market is rarely a prudent strategy, analysts have warned.
Global stock markets have faced a difficult month, with indices selling off on the back of higher US bond yields as factors such as the US/Chinese trade tensions and signs of slowing global economic growth take hold.
Indeed, heavy falls in the US on Wednesday saw the market – which has been the strongest performer over 2018 – hand back this year’s gains and move into negative territory – although it pulled back ahead in Thursday’s trading.
Price performance of indices in 2018 in local currency
Source: FE Analytics
Tom Elliott, international investment strategist at deVere Group, said: “Global stock markets are currently in a nervous mood. Despite reasonably strong economic and corporate earnings growth at present, there is a growing suspicion amongst investors that the best days of the current economic cycle are behind us.
“Unsurprisingly then, risk is out of fashion. Hence the sharp declines we have seen in risk asset classes such as stock markets, while defensive assets such as US Treasuries are in demand.”
Investor sentiment in the UK has taken a substantial hit this month. The Hargreaves Lansdown Investor Confidence Index fell to a 23-year low in October, falling to 53 points. This is down from 58 points in September and is well below the 10-year average of 92 points.
Brexit was at the top of concerns for those polled by the investment platform, which asked 510 respondents whether they thought the UK stock market will be higher in six months, one year and three years. General global instability, the UK’s productivity problem and the potential for inflation were also cited as causes for concern.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Investors are in grim mood, as time is running out on Brexit negotiations with little progress on show. Sentiment was dented by the financial crisis, but not to the extent we are seeing today.
“That’s perhaps because the crisis unfolded in an unscheduled fashion, while the timeline on the UK’s withdrawal from the EU is there for all to see. A looming early Budget and a stormy October on the markets will do little to settle nerves.
“These are challenging times for investors who are faced with a significant known unknown in the form of Brexit. In such circumstances, it’s worth falling back on the basics of investing. That means taking a long-term perspective, keeping diversified, and drip-feeding money into the markets to take advantage of any dips.”
Hargreaves Lansdown Investor Confidence Index – Oct 2018
Source: Hargreaves Lansdown
On the global stage, deVere Group’s Elliott pointed out that investors have their eyes on the Federal Reserve’s determined move to increase interest rates in the US, the economic impact of US trade tariffs and the “dangerously high” borrowing in China, which the country is trying to curb.
In light of the above, both the International Monetary Fund and the Organisation for Economic Co-operation and Development have downgraded their 2018 and 2019 global growth forecasts in recent weeks. Meanwhile, some bellwether US companies have issued cautious trading outlooks, leading market analysts to lower corporate earnings growth forecasts.
But he suggested that investors should hold tight.
“Investors are advised to sit still,” Elliot said. “Assuming that they are invested across the range of financial assets, from defensive government bonds to riskier growth-orientated stocks, and that they have a long-term investment horizon, a ‘do nothing’ approach during spells of volatility is shown by financial history to be the best approach.
“Selling risk assets now, hoping to buy back those assets at cheaper prices in the future, too often proves to be profitable only for stockbrokers. Market timing is harder than it looks.”
Other investors continue to remain relatively bullish amid the market falls, arguing that the economic backdrop continues to look robust and favours risk assets over the long run.
Barclays Smart Investor’s head of investment strategy Will Hobbs noted that unsteady markets can be self-reinforcing “up to a point”, as any dips tend to lead to bearish commentators resurfacing to issue warnings of “economic apocalypse”.
According to Hobbs, there appears to be a disconnect between “decent” incoming economic and corporate data and how the market reacts to that data. While he conceded that there could be a legitimate reason for this disconnect, such as an adjustment from too rosy an outlook for asset prices, he does not believe investors should be fleeing risk assets at this point.
“Our hunch remains, however, that this latest bout of market dyspepsia owes more to the still reverberating worries about what happens when the long fretted-over global debt pile meets higher US interest rates,” the investment strategist concluded.
“We don’t think we are at a choke point for either the US or indeed the global economy – rather, we think that sentiment has gone too far into the negative and would bet against that gloom.
“This is part of the reason why we continue to hold overweight positions in both developed and emerging market stocks in our current tactical portfolio, and why these overweight positions are still funded from a mixture of the more defensive areas of the world’s capital markets.”