The rollercoaster ride
Author: Cathy Dixon
The last few weeks have been traumatic for any investor; with extreme movements in the markets within a matter of days. The FTSE 100, for example has seen a short term high of over 5800 on 16 April lurch downwards to 5045 on 7 May, a swing of almost 13.5%. Nor is the FTSE alone: both the Dow Jones and the Hang Seng have seen swings of over 12% over the course of a couple of weeks.
It comes as no surprise that such extreme market reactions are mainly attributable to the fundamental – and previously virtually ignored – problems in the Eurozone. The Greek situation, which has been rumbling on for several weeks has led to exposure of many flaws now emerging in the single currency area. For too many years – and on a global basis – some countries have adopted a borrow and spend policy, apparently not appreciating that when global growth slowed so too would the sustainability of such a strategy. Greek debt is at astronomic levels, but it is the interdependency of European countries and therefore the risk of contagion that is spooking the markets. On May 7th it was not the uncertainty of a hung parliament that was the primary cause of such a huge fall (the previous night saw the US market tumble by almost 1000 points at one stage) but concerns of the European situation. Recovery came in a dramatic fashion on Monday 10th as the huge bailout package that had been thrashed out over the weekend was welcomed with relief; but on Tuesday a bad night in Asia once again fed into renewed selling. Worries also resurfaced about how adequate the package is on a longer term basis.
Part of the problem with such dramatic movements is that they can induce more extreme swings. Hedge fund strategies (such as taking long and short equity positions) find favour as increased volatility tends to throw up more opportunities to make quick profits. Such times are traumatic to say the least for private investors and it is very hard to know what to do for the best. However, once one looks at individual share prices the picture becomes less daunting. Probably the most volatile sector has been mining over the past few weeks, exacerbated by the “super tax” proposals from Australia. Looking at the more defensive areas, there is little doubt that value is emerging and it is hard to argue against very selective buying of quality companies on a bad day in the market.
This period of volatility is unlikely to be over quickly, though. We still face numerous uncertainties, both at home, as the new coalition gets down to the infinitely more demanding task of making policies and taking hard decisions as promised and abroad as the realisation of the precarious state of public finances brought about by such high levels of borrowing begins to really hit home. While caution is clearly necessary, the current market does give rise to opportunities and returning to fundamentals should pay off for the long term investor.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of Smith & Williamson Investment Management.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority. Registered number 131816.