August 5, 2011 3:48 pm

Market turmoil presents opportunities

Fund managers and wealth advisers claim that the continuing sell-off in world markets is creating buying opportunities in emerging market equities – but disagree on the right time to buy back into high-yielding Western stocks.

On Friday, with the S&P 500 index down 11 per cent in 9 trading days, Fidelity International said Asian and emerging markets were already looking “oversold”, compared with developed markets, given their faster-growing economies and lower debt levels.

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Star fund manager Anthony Bolton, who runs the group’s China Special Situations investment trust from Hong Kong, argued that, in Asia, a bull market in equities would soon resume.

“I believe the recent stock market volatility reflects a familiar pattern during this bull market of short, but often very sharp set backs, within a bull trend,” he said on Friday.

“This makes the case for exposure to developing markets and particularly those of Asia even more compelling where growth rates by comparison – even though they are slowing – will still be very attractive. History shows that normally extreme equity market volatility, as we are now experiencing, should be seen as a time of opportunity rather than a time to become more defensive.”

His views were echoed by investment advice firm Dennehy Weller & Co, which said it was seeking to buy into Indian equities on behalf of clients, on any further weakness. “We’re looking for opportunities to buy around 16000 on the BSE Sensex,” explained managing director Brian Dennehy. “India is an outstanding global prospect for those wanting to take a bit more risk. The demographics are very attractive compared to most of the rest of the world, and it is years behind China in its development.”

Some fund managers are already rebuilding positions in developed world income stocks, on valuation grounds. Threadneedle’s chief investment officer, Mark Burgess, said: “I do not know if this marks the low of the equity markets, but I do know that valuations are low and companies are strong financially. In UK equities, the dividend yield on the market is now 1 per cent higher than on 10 year gilts – a valuation anomaly I have never seen before”. He revealed that his funds bought more UK equities on Friday morning.

Fidelity also saw opportunities in the higher-yielding shares of larger companies. “For the last 20 years, investors have bought equity markets for capital growth, but now is the time to buy equities for income,” said global chief investment officer Dominic Rossi.

At fund manager Jupiter, the focus was on US large-cap stocks. Chief investment officer John Chatfield Roberts said: “It is at difficult times like these that we have to remind ourselves that companies are generally in excellent health. By way of example, two-thirds of the US companies in the S&P 500 Index have now reported Q2 earnings and 73 per cent of those have exceeded analyst expectations. Our view is that as always in investment, patience is required, and that volatility in share prices creates opportunities.”

Some wealth managers suggested more patience would be required, however. Adrian Lowcock senior investment adviser at Bestinvest, suggested waiting for government intervention. “In our opinion, equities are decent value,” he said. “Unfortunately, there’s no reliable way to predict whether markets have yet found a base. The further equities fall, the greater the chance that more quantitative easing occurs or that European authorities are galvanised to provide a credible solution to the debt crisis.”

Dennehy Weller & Co warned its clients that the FTSE 100 could fall to 4800 this year – but added that “the focus now should be on identifying the best investments once we hit bottom”. It expects to find them among high yielding shares from global businesses with limited debt. “We don’t think we have seen the bottom – but we’re building a shopping list,” said Mr Dennehy. “As no one knows precisely where the bottom might be, we will be recommending clients drip into these funds over 6 months.”

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