Stock market sell-off: where to hide, where to find bargains

The stock markets sell-off gathered pace again overnight (9 February), with US and Asian markets posting sharp declines. The Dow Jones index dipped 4.15 per cent and the S&P 500 lost 3.75 per cent, while the technology-heavy Nasdaq index declined 3.9 per cent. 

The losses spread to Asian markets. China led the rout, with the SSE Composite index falling 4.05 per cent. Other markets lost ground, with the Hong Kong Hang Seng index down 3.1 per cent and Japan’s Nikkei 225 index recording a loss of 2.3 per cent. 

European stock markets were also in the red this morning, although losses were less severe. In the UK. as at 12.30 on (9 February) the FTSE 100 was down 0.85 per cent, trading close to 7,100 points. The FTSE All Share and FTSE 250 indices were also showing losses of 0.8 per cent and 0.68 per cent respectively. Other European markets posted steeper declines, with the German Dax and French Cac down 1.67 per cent and 1.51 per cent.

The million-dollar question, as with every market sell-off, is whether the declines will prove to be a short-term blip or the start of a more pronounced market correction, possibly triggering the start of a bear market.

The general feeling among market commentators and money managers is that the sell-off was ‘overdue’, after a strong 2017 for global markets generally when volatility was at extremely low levels compared to history. Prior to the sell-off, the expectation was that a market dip was inevitable at some point as valuations became pricier, particularly in the US.  On one respected valuation measure (Cape) the US market has only been more expensive on two other ominous occasions – 1929 and 1999. 

But, while pricier valuations are one factor behind the sell-off, a bigger driver is the move by the US Federal Reserve to tighten monetary policy by raising interest rates in the face of rising wages and fears of an uplift in inflation. As Ben Yearsley, a director of Shore Financial Planning, observes, the panic seems a little odd, particularly when rates in the US went up three times in 2017. 

‘The strange thing about the market falls is that they have been driven by positive rather than negative news. Markets are in a tizz about interest rates increasing more quickly than expected in the US in 2018. Following strong unemployment numbers last week and GDP growth powering ahead, markets are now worried about inflation kicking back in, which will mean more rate rises to combat it.’ 

The other big concern – which is spooking markets and will no doubt cause further sell-offs in the future – is what happens when the cheap money era draws to a close. As Alex Scott, chief strategist at Seven Investment Management, points out, quantitative easing policies have ‘underpinned market confidence and valuations’ for a number of years now. 

Most commentators, however, stress that the sell-off is unlikely to herald the start of a full-blown downturn, which would lead to a bear market. The health of the global economy is fuelling investor optimism, while investor euphoria is noticeably lacking, with Investment Association statistics showing fixed income funds were more popular than equity funds in 2017. 

Where to find bargains 

The sell-off has created bargains for bold investors, particularly in the case of investment trusts, where value opportunities have been hard to find of late. There are now a couple of bargains to be found in the Asia and emerging market sectors. 

Aberdeen New India, for example, is currently trading on a discount of 14 per cent, wider than its 12-month average discount figure of 11 per cent. Other trusts that look cheap include Utilico Emerging Markets, on a 13.3 per cent discount versus a 10 per cent one-year average, and Fidelity Asian Values, which is offering a discount of 9.4 per cent versus a one-year average figure of 4 per cent. 

Due to the structure of open-ended funds or unit trusts, finding a bargain among them is more of an art than an exact science. But, given the steep falls across the globe, fund investors should be looking to top up exposure to areas where they think the sell-off looks unjustified in relation to the region’s long-term prospects. Japan, for example, may now be worth a closer look.   

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In the case of individual equities, domestic UK stocks have become even cheaper after suffering further share price falls, while in terms of sectors banks stand out for their low valuations.   

Fund for a falling market 

Investors who are instead looking to take stock and reduce risk, perhaps fearing a more pronounced stock market correction, may want to consider a fund that prioritises capital preservation. The trade-off is that in rising markets these funds will lag both the stock market and many of their sector rivals.

Darius McDermott, managing director of FundCalibre, picks out BlackRock UK Absolute Alpha, a fund that bets on share prices falling as well as rising. He also likes Premier Defensive Growth, a fund that he says has been thoroughly tested in a wide range of scenarios and has continued to deliver.

He adds: ‘Many people will be worried that this is the start of a prolonged correction, but I think this is premature. It is a good wake-up call to investors to make sure their portfolios are in a fit state to withstand such an event, however – to make sure their portfolios are diversified and have some form of cushion to lessen the impact of a larger fall.’ 

Money Observer Rated Funds that are run in a cautious manner include TM Fulcrum Diversified Core Absolute Return, Old Mutual Cirilium Conservative and Artemis Monthly Distribution

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