Fund managers reveal whether they're buying or selling this stockmarket correction

After a sharp fall in prices, equities have become much cheaper, but are they now enough of a bargain. This team of experts tells Jim Levi what they're doing now.

The mood in financial markets changed quite dramatically in the second week of October. More specifically, Wall Street, which had seemed to defy gravity all year, finally cracked.

In that one week the Dow Jones index fell more than 1,000 points, while the Nasdaq dropped 1,400 points. US equities led other equity markets lower. Japan's Nikkei 225 index shed over 1,000 points while European markets were brushing their lowest levels for nearly two years. In the UK, the FTSE 100 slipped below the 7,000 mark for the first time since mid-March. And of course, emerging markets had been out of sorts since the start of the year.

Before Wall Street cracked, it had appeared to be the only game in town, and there it had been largely buoyed by the strength of the leading technology stocks. When that support began to evaporate, US equities had what has been called their 'Wily Coyote moment' – a reference to a popular cartoon character who repeatedly finds himself plunging from the top of a cliff.

Chris Wyllie of Connor Broadley sums up his view of the correction:

"Interest rates are going up, the dollar is going up and world energy prices are going up. Against that background equities were always going to struggle."

He has gone underweight in equities overall during the summer, and has switched some more funds into those two more defensive sectors, corporate bonds and property. He still does not care for government bonds even though US Treasuries now attract a three plus plus return.

He thinks he spotted the turn in the crucial US mood from a survey of fund managers by Bank of America Merrill Lynch, showing for the first time in a long time that investors had gone overweight in US equities.

"It meant that the long-term bears of US equities had finally been defeated and gone back into the market," he says. "Effectively it meant that there were no more buyers left."

Wyllie does not think the resumption of the long bull run in equities will resume quickly. He thinks the present correction will probably last until the spring.

"If by then there are signs that the US economy is cooling down, the central bank may then pause on any further increases in interest rates."

Monique Wong of Coutts, however, is keeping her cool. "This is a correction in a bull market," she insists, "and therefore a window of opportunity."

Rob Burdett at F&C Investments, has for some time felt that a correction in US equities was overdue and had already dramatically raised his cash score to reflect that. However, like other investment managers, he had found it hard to stay out of the US while the economy appeared so strong and the market mood had been upbeat.

"Now I think the markets will be on the negative tack for a little while so I think there will be better buying opportunities further on. Overall we feel the correction is healthy. Every now and then you need a sharp frost and then fresh growth can reappear."

Richard Dunbar at Aberdeen Standard Life does not much go in for dramatic changes. This time around he has lowered his score on commodities (he thinks the oil price may be nearing a peak) to move into global bonds – specifically attracted by the higher yields on offer in US Treasury bonds.

Dollar doubts

Dunbar sounds a note of caution on the trend in the dollar – the major influence on financial markets in recent months. "The arguments for a strong dollar are in front of your nose every day," he says. "Not many people think the dollar is going down. A strategy based on a strong dollar feels very consensual and those sorts of unanimous views should make investors be careful." He is not therefore tweaking any of his equity scores.

Over at Schroders, Keith Wade shares Dunbar's caution about the dollar. "There are one or two signs that the dollar is beginning to peak," he says. He notes that it has already moved up quite a lot and is close to an historic peak against a basket of leading currencies. "We expect US interest rates to peak at 3% next June. We think the economy will be cooling by then."

Wade argues that the global trade war triggered by president Trump is going to get worse. "As a result we see global trade being weaker in 2019, and this is one of the main reasons we have downgraded our global growth forecast for next year from 3.2 to 3%," he comments.

He admits his team have debated ‘pretty actively' during the summer months whether to go underweight in equities. "But we have resisted the idea and tended to keep our equities stance biased to the US, where the economy still has lots of momentum."

For some time Rob Burdett at F&C Investments has kept the highest score for cash of any panel member, to reflect his view that volatility in equities will create buying opportunities. "Market conditions are certainly trickier than normal, but I am taking comfort from the backdrop of steady economic growth," he says.

"It is hard to be negative of US equities with the dollar so strong. Earnings of US companies have surpassed expectations to the point where the market is cheaper today than it was at the beginning of the year."

Burdett has kept all his equity scores the same apart from raising his exposure to Japan. "Global growth may slow in 2019, but it looks good for the next six months," he says.

He remains the panel's torch-bearer as far as Japanese equities are concerned; this sector has become the most popular category in our list of investment choices over the autumn. Recent visits to the country, he says, confirm "everything we know and love about Japan. The corporate earnings performance has lately been even better than in the United States."

The ATM of Asia

In some ways this is a defensive ploy, as the Japanese yen tends to be a safe haven currency when turbulence strikes financial markets. The downside for Japan lies in its being the first major market to open and the first to react to bad news. "On the day after the Brexit vote, the Japanese market fell 8% but quickly recovered later," Burdett recalls. "Hedge fund managers describe it as the ATM of Asia, where they can trade quickly and early."

There has been a significant rise in support from the panel for the property sector, where the average score has risen from 4.6 to five. It is now seen as a less risky option than some equities. Here Rob Burdett has decided to raise his score to 6 and is matched by Wyllie. "I do not think property will be at the epicentre of any economic downturn next time round," Burdett argues. "If markets turn down, I think property will probably fall less or not at all."

"In property we are focused outside London," says Wyllie. "Prices have not changed but the sector has become relatively more attractive compared to equities."

Wong describes the sector as "reassuringly boring". She takes comfort from a World Bank survey showing Britain is one of the easiest places in the world to do business. "I cannot imagine Britain will be making it less easy going forward, even with a hard Brexit." Meanwhile, she feels the weaker pound will continue to stimulate foreign investment in UK real estate.

The glorious muddle over Brexit continues to dominate the UK outlook, so some readers may find it surprising how positive the panel are about the outlook for our domestic equity market.

That's the case even though, as Wyllie says, "nothing really good has happened lately to the British economy."

But then Wyllie enjoys betting against the crowd. "A lot of investors have sold already by now and I start to get interested when the consensus is underweight," he says.

Brexit bond bonus

Overseas investor concern about the huge uncertainty over the Brexit outcome continues to keep foreign buyers at bay. All the panel nevertheless agree that the FTSE 100 stocks with their export and overseas earning bias provide a healthy protection against both the strong dollar and a weak pound.

Wong sticks with her bullish score of eight for UK equities, saying there is still a case for describing them as cheap and a good each-way bet, whatever the Brexit outcome. "While the FTSE gives some protection against a bad Brexit, a good Brexit would be of unequivocal benefit to sterling - but a good Brexit might help UK equities as well after the initial reaction, because they have been so under-held."

Burdett remains firmly on the fence over UK equities, with a score of five.

"The fence is the place to be for now because I don't think anyone is expecting a good outcome from Brexit negotiations," he says. "Should one materialise, that would obviously be positive for shares. On the other hand a weaker pound could boost the FTSE 100."

The panel as a whole remains underweight in government bonds, though the 3% plus yield on 10-year US Treasuries has prompted Dunbar to up his score, following on from Burdett's upgrade in August. "With growth expectations slightly reduced and a lot of uncertainty around, we want to increase our exposure here while maintaining an overall risk-facing portfolio," he says. "We think these yields are reasonable."

Wade, however, has found an unexpected way to protecting against the growing likelihood of an uncomfortable Brexit outcome. He has decided to raise his score for UK government bonds (gilts) from three to six. "When the pound falls, the gilt market tends to look beyond the initial impact to the possible weaker economy potentially creating a recession," he argues.

The showing by European equities continues to disappoint, with two of the panel staying underweight and Wong lowering her score from seven to six. She fears the European Central Bank has been too slow in tightening its loose money policy.

"They should have started last year, because this year growth has started to decelerate and will decelerate a bit more next year."

Although our panellists seem to be taking the current equity market setback in their stride and hoping that it is really a healthy correction, it may not be so. Much depends on the ability of the US to maintain reasonable growth in 2019, while keeping inflation in check.

The oil price – determined as much by geopolitics in Iran and Saudi Arabia as by anything else – probably remains the greatest imponderable. The pessimists fear it may swing upwards towards the $100 level and trigger the end of global growth. The optimists hope the pressure for higher interest rates may peak by the late spring so the long bull market in shares can resume after this current shakeout.

Source: interactive investor   Past performance is not a guide to future performance

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