‘Buy the dip’ may have run its course

NEW YORK: “Buy the dip” has worked like a charm over the past decade, thanks to market-friendly policies from central banks around the world.

But the recent sell-off on Wall Street and surge in volatility have left many fund managers wondering whether they should stick with the age-old adage and keep loading up on stocks when they slump. There are fundamentals, such as robust global growth, that suggest the strategy will remain a moneymaking one; there are other developments, such as central banks’ gradual withdrawal of monetary stimulus, that indicate the trade is petering out.

Buying on dips has become “folklore” in the markets, says Man Group CEO Luke Ellis. “When volatility increases you should run fewer positions. When volatility is low you can run bigger positions. It’s basically about taking the same amount of risk all the time.”

“The current market correction is a buying opportunity,” says Christian Hille, global head of multi-asset at Deutsche Bank, who manages €113 billion. “Macro and micro fundamentals remain strong with a Goldilocks-like environment — not too hot, not too cold — and moderate economic growth with low inflation, rising corporate earnings and a low-yield environment.”

“We are in the buy camp,” says Michael Mullaney, director of global market research at Boston Partners, which manages $99 billion. “Nothing has fundamentally changed over the last two weeks except for the fact that stock prices are lower and we are able to buy good companies that were too pricey before.”

Richard Bernstein, CEO of Richard Bernstein Advisors, which has $6.5 billion under management, offers a caution: “I don’t think it’s a question of ‘buying the dip’, but rather what you are buying on the dip? It makes no sense to me to buy the old leadership within the stock market (such as income, quality, defensive plays).”

He believes “volatility always signals a change in market leadership” and that “the recent correction is a signal that the deflation/ disinflation trade is over, and the market is recalibrating to a more inflation-oriented period.”

Ian Harnett, chief investment strategist at Absolute Strategy Research in London, believes there will be some scope to profit from buying the dips until interest rates go up, but he adds: “We believe that for many investors, who already have money invested in these markets, the better strategy will be selling the rallies in both equities and bonds.

“After a period of benign economic activity when inflation has been subdued and growth healthy, we worry that 2018 will see signs of more inflation as we get close to the end of the cycle and potentially slower growth if global activity falters. Having a more defensive mindset, therefore, is of the essence.”