Dubai: What should investors do in a volatile market, which many experts expect to sustain amid a reversal in quantitative easing?
Investors in equity markets who were sitting on hefty returns from last year received a jolt after the volatility index jumped to 40 last week, a 300 per cent jump from early January. The Dow Jones Industrial Average tumbled nearly 1,600 points on Monday, the single largest intra-day fall in history.
Analysts think that volatility is here to stay amid a reversal in easy money policy from the central banks, which was in place for nearly a decade.
“In terms of our advice: for private investors, portfolio diversification is always paramount. The rally in treasury bonds reinforces the case for diversification, and holding assets uncorrelated to stocks. Investors should consider rebalancing strategies if their portfolio allocations have drifted away from their target ranges,” Maximilian Kunkel, ultra high net worth strategist at UBS, told Gulf News.
Most fund managers think that the sell-off was long overdue in equities especially in the United States where stock prices traded at higher multiple compared to its counterparts in Europe and Japan.
Positive fundamentals
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.
“A good correction occurs when only the technical factors are stretched but the fundamentals are solid or improving. This is the case today. Momentum and valuations are high, but we have rising corporate earnings and improving consumer sentiment. Releasing some of the exuberance is healthy for the market,” Colin Moore, Global Chief Investment Officer at Columbia Threadneedle Investments said.
The 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 see any further decline in equity prices as an opportunity to be a selective buyer of risk assets in multi-asset portfolios. The global asset allocation team is currently overweight emerging markets, commodities and alternative investments. As active equity managers who conduct fundamental research on the securities we invest in, we’ll continue to buy both US and global stocks if their prices drop to our price targets and their fundamentals are strong,” Moore said.