Equity markets entered correction territory this month, reminding investors that markets do go down as well as up, after a year-and-a-half of upward moves for many indices around the globe.
The big question on everyone’s minds now is whether this is a necessary correction or the start of a prolonged downward spiral. Certainly prior to the correction the talk was increasingly about bubbles forming in many different markets, and quite a few of them – the UK included – have now seemingly popped.
But a bubble bursting doesn’t necessarily mean the start of an Armageddon scenario, especially when ultra-supportive monetary policy remains in place in many regions.
So what is to come next? Richard Philbin, CIO at Wellian Investment Solutions, says there is a sense of markets heading “back to reality” after years of extraordinary support from central banks.
“What we are seeing now is actually normal. It’s the latter part of the cycle and this level of volatility is actually what we should be seeing,” he says.
“When rates are low you can hide a lot of sins and that keeps markets buoyant, but now this shake-out – and the chance of Wall Street diverging from Main Street – could create some clear winners and losers.”
Philbin says now is the time for investors to think more carefully about risk and reward, with cash potentially playing a bigger role for portfolios. “If they can’t see the clear daylight now then investors should tread carefully. This isn’t about going 100% to cash, especially as summer lasts longer than winter. But winter feels horrible, and therefore investors can let some cash build up during such periods.”
Tamsin Evans, investment director at P-Solve, agrees the cycle is long in the tooth. “There is complete agreement now that we are at the late-stage of the cycle, and it is a question of when, not if,” she said.
“Investing depends on time horizons so investors must consider their own situations carefully, but certainly for some the right move now will be to diversify into bonds and out of equities.”
Adrian Lowcock, investment director at Architas, had been moving overweight cash since the start of the year, with a view to using it to take advantage of drops in the market.
“Valuations remain expensive, and prior to the falls in February, developed markets in particular were certainly overstretched from a technical perspective,” he says.
However, longer term, Lowcock says synchronised global growth remains supportive of markets.
“Corporate earnings forecasts for the year are actually fairly modest, and as such there has been plenty of scope for upgrades, particularly in the US where tax cuts should feed directly into corporate earnings for the year.”
In the near term there may yet be more volatility to come of course, but ultimately after a correction of this scale, and with a wall of money still sitting on the sideline looking for an opportunity to participate in the prolonged bull run, markets could well bounce back sharply until the outlook changes.