Stocks volatile as global rout persists

DROP GAVE MARKETS A BREATHER AFTER A ONE WAY RALLY SO FAR, FUND MANAGER SAYS

Astock market rout that began in the United States took on global contours yesterday, as investors from Tokyo to London sent shares tumbling. Wall Street opened lower but then recovered.

The sharp falls, including Wall Street’s drop of more than 4 per cent on Monday, have come despite generally positive economic news around the world. The declines were made worse by panic that stock values had peaked, that a correction was under way, and that investors would suffer even bigger losses if they waited too long to dump their holdings.

The Dow Jones industrial average fell more than 500 points after the opening bell, but swiftly recovered those losses. The previous day’s drop, which included an intraday loss of nearly 1,600 points, which marked its single biggest loss ever, dragged global markets down for most of the day. Japanese stocks were down 4 per cent, while India’s Sensex index was down 1.6 per cent.

However, going forward, fund managers said they will wait for signs of stability before buying. “The drop gave markets a breather after a one way rally so far, but the movement in positive and negative indicates the uncertainty in the minds of traders. We are yet to see who will get an upper hand in this market will it be bulls or bears,” Nadi Bargouti, managing director and head of asset management at Emirates Investment Bank, told Gulf News.

“We would tread carefully and start preparing to re-enter the market as they stabilise. Technically the market is getting more attractive. We see the recent retracement as healthy, given the strong run in equity markets last year,” he said.

Many saw the crash as long overdue in global equities but they didn’t get the timing right. Fund managers have been cautious about equities as markets seemed to ignore all the negative factors like expectations of higher inflation and faster than expected rise in interest rates in the United States in the backdrop of strong global growth, a pickup in corporate earnings, the historic tax legislation in the United States among others.

The Dow Jones Industrial Average gained more than 30 per cent last year on the back of the positive fundamental factors and that momentum sustained until January. But last week when the robust jobs report showed wage growth in January posted its biggest annual gain since June 2009. That fanned expectations that the US central bank will raise rates faster than expected, causing panic in global equities.

On Monday, the Dow Jones Industrial Average tumbled by 1,600 points, the largest single day fall in history of crashes, and was aggravated by smart beta, passive, quant funds and momentum investors, but fund managers say that crash in global markets was much needed after lofty valuations.

“What we are seeing now is profit taking driven by extended valuations and concerns about higher inflation taking roost in the US and elsewhere. The question now is where and when the market correction stops, and no one should profess to have the answer. Some investors have become over-extended, and will suffer from forced selling but eventually fundamentals will matter again,” Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments said in an email.

The market crash has caused investors to lose $4 trillion in value, but fund managers are less concerned because fundamentals are still strong. The International Monetary Fund expect 2018 growth to be 3.9 per cent, an upward revision from the previous estimate, calling it a case of a strong synchronised growth from most of the global economies.

According to UBS, about 80 per cent of the companies have published their results and are on track for a 13-15 per cent earnings growth and 7 per cent revenue growth. The companies have given higher guidance in 2018 after taking a lower tax rate into consideration.

“We don’t see any panic in the market. We do not think it is anything sinister but rather a healthy correction after a strong 2017. The growth outlook and company fundamentals remain strong. We have full employment, healthy consumer trends and credit levels. At current valuations, it could be a good entry point,” Nadia Grant, head of US equities at Columbia Threadneedle Investments said.

But some fund managers are not resorting to buy calls as yet.

“The setback [on Monday] is not over but we are approaching a bottom. I still hold the opinion that the favourable economic fundamentals that are in place, where we are in the business cycle, the breadth of the market, and levels of current valuations are supportive of equities,” Scott Minerd, managing partner and Global Chief Investment Officer at Guggenheim Partners said on Twitter.

Volatility

The underlying message from fund managers is that — get used to the massive volatility, which had been suppressed by central banks due to quantitative easing.

“The low volatility regime is likely dead — 2017 and early 2018 were a crazy anomaly” Peter Garnry, head of equity strategy at Saxo Bank said on its website.

The VIX or volatility index jumped to 37.32 levels, nearing to levels last seen in 2015. The index had been in a range in the past three years.

“US monetary policy is in the process of normalising after a period of unusually ultra-easy monetary policy and record-low bond yields. Investors should expect volatility to return to normal too. History shows that during a bull market we should ordinarily expect five days per year with greater than 2 per cent drops,” Mark Haefele, global chief investment officer at UBS said.

In all, the message is simple for traders.

“It is hard to assess the current contagion risks, such moves are usually rewarding for hard-boiled traders who can go in and out of markets within a few hours. In contrast, investors are best advised to sit the current turbulence out until they feel assured that no bigger contagion is looming,” according to Christian Gattiker, Chief Strategist and Head Research, Julius Baer.