Strategists unfazed by market downdraft

Singapore

MARKET strategists are mostly unfazed by the recent market correction, and say that the recent downdraft is a "buy" opportunity.

Global stock markets lost some US$5 trillion in value in early February, as markets entered into correction territory. They have since retraced some of the losses. MSCI all-country indices show that February returns are negative, but year-to-date returns remain in the black.

BlackRock's global chief investment strategist Richard Turnill has, for instance, upgraded US equities to "overweight" from "neutral", citing strong earnings momentum. In a note this week, he said that impending US fiscal stimulus is "supercharging" US earnings growth expectations.

"Our US upgrade boils down to a fundamental story underpinned by earnings growth. An added bonus: US valuations look slightly more attractive after the February stockmarket swoon. Economic strength was already changing the tone of earnings momentum, but US tax cuts and government spending plans lit a fire under the trend," he wrote.

Jan Amrit Poser, Bank J Safra Sarasin chief strategist who was in Singapore recently, said that 10-year US Treasuries' recent spike to nearly 2.9 per cent was a shock. "But I don't think it changes the fundamentals - which are that there is growth, supporting margins and profits. Valuations in equities are justified by economic fundamentals."

He added that the market correction was healthy. "Stick to your guns. If you're not already overweight, now is the time to buy into markets. The question is always how long the correction would last; we can't time it on a day-to-day basis."

He said that the market is seeing a "regime shift" from very low growth and low interest rates to one of rate normalisation - and hence, the volatility. "We continue to see three rate hikes (for 2018), which is in line with the Fed's 'dot plot'. To some extent, the risks are tilted to the upside but market turmoil has also led to a deterioration of the Financial Conditions Index so the Fed will think twice before hiking four times this year."

BofA Merrill Lynch's fund manager survey in February, however, stops short of telling investors to buy the dip. The survey, conducted between Feb 2 and 8, found that fund managers were rotating into cash and out of equities, and the average cash balance has risen to 4.7 per cent from 4.4 per cent in January.

Allocation into equities fell to net 43 per cent from net 55 per cent overweight, the largest one-month decline in two years.

Ricky Chau, portfolio manager for Franklin Templeton multi-asset solutions, believes that 2018 will be a positive year for equities. Even as central banks seek to normalise policies, liquidity remains ample. "When we aggregate the balance sheets of the US, Japan and European central banks, the balance sheet is relatively flat to slightly down. But ECB and Japan are still growing. The net effect is that there is sufficient liquidity to drive the theme that growth remains supportive of equities."

The bull market, however, is in a mature phase. "High valuations drive concerns. We believe markets are likely to rotate from growth into value," he said. He favours emerging market assets, both equities and fixed income. He added that 2017 was an outlier in terms of the unusually low volatility and a very shallow drawdown - the MSCI World index showed a maximum drawdown of only 2 per cent.

Volatility ahead

"Looking at data, the median drawdown tends to be around 8 per cent for global equities. From our perspective, volatility will be not just in equities, but also in fixed income because of QE (quantitative easing) normalisation. And the divergence of monetary policy will also hit fixed income and currencies."

Investors, he added, will need a broader diversification to weather market corrections. "But in general, the economy is healthy and fundamentals are strong. The only risk that could turn the macro economy is something unexpected - like geopolitical risk or unexpectedly higher inflation which could trigger faster rate rises. At this point, that's not our base case; we're still bullish equities especially emerging markets."

Eric Mueller, BlackRock director and multi-asset product specialist, said that the recent volatility does not signal a shift or deterioration in market fundamentals. "It was largely the unwinding of several very crowded speculative trades. In our view, the macro economic backdrop continues to look quite strong, and earnings continue to impress. The recent bout of volatility presents a buying opportunity. We are looking to add more exposure to certain parts of the market at more attractive prices than what we saw a few weeks ago."

He added: "Our anticipation is that 2018 would continue to see markets grind higher in the year, but you would likely see increased volatility as well. It's less of a straight-line experience . . . but ultimately one where investors would continue to make money."

He said that investors typically see multi-asset funds as a way to participate in market upside, but "in a more diversified, measured way where you have flexibility to help protect against moves in the market". For a multi-asset fund with an income objective, for example, the manager could take on a covered call strategy - that is, sell call options to generate income for the portfolio. On the fixed income side, there is also the flexibility to invest in floating rate instruments and mortgage backed securities.