Trading screens across the London stock market are flashing red on Tuesday. Investors are in the grip of panic selling. How are fund managers dealing with the fall out?

Bracing themselves for more, but staying calm, seems to be the pattern of behaviour.

‘This episode of market volatility has not yet played out and could well involve more wrenching trading sessions for investors,’ says Alex Scott, chief strategist at Seven Investment Management.

AMAZING STOCK MARKET RUN

Recent years have been extraordinary for stock market growth, yet how quickly investor sentiment can change.

Scott and his colleagues have been concerned about stock markets and equities for a while prompting the Seven investment team to ‘operate with some caution.’ That has meant remaining exposed to the strong run in equity markets, but from a more selective standpoint.

Seven has also been increasing stakes in alternative investment assets, those likely to offer a level of insulation from stocks if, or when, the crunch came. Gold is typical safe-haven asset.

He is not alone. Fund manager Mark Slater has been among several voices to have talked up the increasingly likelihood of a correction in valuations in recent months; that has now come to pass.

NOT THE BEGINNINGS OF A BEAR MARKET

Yet Seven’s Scott bats off claims that this is the start of something far worse than a correction. ‘It would be extremely unusual to see a sustained or deep equity bear market against such a positive economic background,’ he says.

The global economy is in good shape, he believes, with data continuing to point towards synchronised growth across the major blocs of the US, Europe and Asia through 2018. There’s even a decent chance that growth could accelerate as corporate capital spending improves.

‘The economic cycle has not yet turned, the growth outlook remains healthy, and this suggests that we face a market correction, not a sustained downturn or a recession,’ says Scott.

OPPORTUNITIES OUT OF THE PANIC

The market strategist also makes the point that equity markets will continue to offer excellent value creation opportunities once the worst of the panic subsides. Down the line there will be more advantageous opportunities to invest, Scott says, and ‘these may soon appear.’

'Irrespective of short-term market movements, we believe that we are returning to a more normal cycle of higher yields and higher interest rates,' says Graham Bishop, investment director at Heartwood Investment Management.

'Our core view is it will be an orderly transition, as equity markets remain underpinned by solid global growth and strong corporate earnings' Bishops says.

EARNINGS BACKING

So far, earnings in the US have been robust with around 80% of S&P 500 companies to have reported so far (about half of them) beating revenue expectations.

That's the highest percentage since at least the third quarter of 2008, estimates Bishop.

For investors with a long time horizon and robust portfolios, periods such as this offer opportunity. That is Alex Scott’s firm opinion.

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Issue Date: 06 Feb 2018