The best advice to give investors looking at the carnage in world financial markets, which on Monday saw their sharpest falls since the global financial crisis, is to do nothing, according to Dominic Rossi of Fidelity Worldwide Investment. “Anything you try to do now will almost certainly be wrong,” said Rossi, who is Fidelity’s global chief investment officer for equities.
“The way you enter these treacherous markets is very gradually. It takes several months for a market to stabilise and bottom out after one of these sharp corrections and you should give yourselves several months to reposition your portfolio,” he told a media briefing in London.
Monday’s selloff on in the markets was triggered by a 9% dive in China shares which was followed by a sharp drop in the US dollar and further big falls in major commodity prices. European shares shed nearly 5%, while the UK’s FTSE 100 index slumped to its lowest level in almost three years.
“The genesis of this recent sell-off has been the threat of the Fed raising rates next month, but China’s confrontational move two weeks ago (to devalue its currency) and the subsequent knock-on through emerging markets have accelerated us towards something more serious,” said Jim Reid, Deutsche Bank’s head of global fundamental credit strategy.
Fidelity’s Rossi said, while the current crisis was centered in the emerging world, it was likely to have a big impact on developed markets causing a third wave of deflation and a drop in world trade. “Anything you try to do now will almost certainly be wrong. In the short term, markets are going to continue to painful until we get some insight into how the central banks are going to respond to this,” he said.
“The US Fed really needs to send a clear signal to markets that it is going to step back once more. Developed stock markets will recover relatively quickly after this selloff once we know where the Fed is,” he said.
For investors looking to enter the equity markets after the latest selloff, Rossi suggested three important rules. Firstly, avoid leverage. Secondly focus on companies with excess cash flows who can distribute them. And thirdly, invest in innovation, particularly innovation in technology, healthcare and media.
Tech stocks favoured
“At the moment, with markets falling, correlations are rising and as we know as investors they always rise to one as everything gets chucked out. But the leadership of this market when we recover will be US equities and the innovation continuing in healthcare and technology.
Dean Tenerelli, manager of T. Rowe Price’s European Equity and Continental European Equity funds argued that the current crisis was unlikely to derail the recovery in Europe.
“We believe the earnings recovery in Europe is well underpinned. The recent Europe earnings season was the best we have had for five years and the European portion of earnings within European companies is highly encouraging.
What to do when all around you are asking for advice…..? See attached