‘Donald dip’ a buying opportunity – analysts shrug off market falls

Investment experts have shrugged off sliding global stock markets as a buying opportunity and an extended correction that still leaves the Dow Jones index 20 per cent higher than it was a year ago.

Market volatility can precede big fallsThe Dow fell 4.6 per cent yesterday, and European markets fell around 3 per cent on early trading before making back some ground.

Royal London Asset Management head of multi-asset Trevor Greetham said now was the time to buy into the ‘Donald dip’, commenting on the US-led volatility that has been driven by the strongest wage inflation in the US since 2009 which has in turn triggered fears of faster than expected rises in interest rates.

Greetham said that while Donald Trump’s White House has correctly pointed to strong economic fundamentals as a more important long-term story and the role of the tax cuts in driving this, they have failed to appreciate the impact that their policies could have on inflation, and therefore the path of interest rates.

Legal & General Asset Management head of asset allocation Emiel van den Heiligenberg described this latest market shock as akin to the Taper Tantrum of 2013 that followed the Federal Reserve’s suggesting it would reduce its asset purchase activity, which ultimately proved to be a buying opportunity for investors.

Greetham says: “Investors welcomed the announcements of tax cuts but are starting to get second thoughts as the consequences of adding stimulus late in the business cycle become clear. Unemployment is low and the potential for strong wage inflation once US tax cuts take effect has spooked markets, given what this means for US interest rate policy.

“Although rising interest rates pose a challenge to the stock market, this will only become a serious one once they are high enough to cause the economy to roll over. With the Fed Funds rate still below the level of core inflation in the US, that could take quite a while.

“We expect bouts of volatility like this to become more common now the Federal Reserve is in play, but expect stocks to recover over the coming weeks and months, making recent market moves look like an overreaction.

“It almost always pays to buy stocks during a panic. We lightened up equity exposure in our funds last week, while remaining overweight. With markets at lower levels, we are looking to add to these positions again as the sell off progresses.”

Van den Heiligenberg says: “In our view, the situation is analogous to the so-called Taper Tantrum of 2013, when bond markets led a broader sell-off following a suggestion by the US Federal Reserve (Fed) that it might scale back its asset purchases. That episode ultimately proved a buying opportunity for the asset classes hardest hit.

“Just as back then, when threats to consensus trades stoked the market upheaval, we believe excessive investor optimism and positioning today have pushed equities back from record highs. And while the global economic recovery was still only just picking up pace in 2013, it is now well entrenched with synchronous growth across regions.

“Rising yields are somewhat justified, however, given the strength of the world economy and quickening inflation expectations in the US. But structural issues – including long-term trends in demographics and inflation, as well as the global debt overhang – should help to restrain market rates, particularly at the long end of the curve.

“Moreover, if the pullback continues much further, there is a strong chance that central bankers act to calm nerves by softening their tone on stimulus-withdrawal, as they did in 2013, to avert an unwarranted tightening in financial conditions. That said, such language would be premature at the moment: we do not expect policymakers to take fright at a stock market correction of 5 per cent, especially after a ‘melt-up’ in equities of more than 5 per cent in the past months.”

Hargreaves Lansdown senior analyst Laith Khalaf says: “This sell-off is the storm after the calm, as we have enjoyed an extended period of plain sailing in markets, which have crunched happily upwards for the last couple of years. Despite the heavy fall in the Dow Jones, the index is still trading around 20 per cent above where it stood this time last year, so it’s important to keep some perspective.

“Global markets are worried the inflation genie may be out of the bottle, after US wage growth jumped up unexpectedly last week.

“The fear is this may prompt the Federal Reserve to raise interest rates faster than expected, which would push up bond yields and make equities look less attractive by comparison. It would also make it more costly for companies to finance their activities if debt becomes more expensive, after a decade of cheap money, thanks to loose monetary policy in the wake of the financial crisis.

“There is also some good news to latch on to if you like your cup half full –  a strong US economy is good for global growth, and that should bode well for company profits. However markets are likely to see this as a double-edged sword, at least in the short term, as it means US interest rates may normalise more quickly.”

Kames Capital chief investment officer Stephen Jones says: “This is a complacent positioning correction, coupled with a month end rebalance after what were, we should not forget, super strong returns in January and December for anything tagged as “risk”.

“Plentiful liquidity in markets has also allowed fast money, model and algorithmic investors, to switch positions from long to short in quick time adding to the downward shift in prices.

“In amongst these moves there is nothing of concern on fundamentals. Data from, and prospects for economies are good. Whilst there is a change in central bank policy and levels of support for markets led by action from the US Federal Reserve, it is being made gradually, and market volatility will in turn temper central bank action further. All central banks … from Washington to Tokyo, via London and Frankfurt err on the side of caution when faced with any uncertainty in markets. Company earnings, with expectations of delivery embedded in them from 2017, have been coming in “just fine” and remind us that the bottom up stock picking environment is still good.

“2018 was not going to be a repeat of 2017 … its good and healthy that the market has made this clear early on. Active managers now have a broader set of opportunities to pursue and manage around.”