'Periods Such As This Offer Opportunity': Managers To Increase Market Exposure Amid Long-awaited Sell-off

Markets have been dropping since last Friday with the S&P 500 suffering its worst weekly performance in two years last week, falling 3.9%, while the Dow Jones lost 4.1%.

The Dow Jones subsequently suffered its worst points drop in its 122-year history yesterday and closed 4.6% down at 24,345 points, while in Asia the Nikkei 225 fell as much as 7.1% in overnight trading before recovering to close 4.6% down.

In the UK, the FTSE 100 sunk 3% in early morning trading before regaining some losses to trade around 7,173 points, a loss of 2.2% on the day so far (as at 11.36am).

In addition, the Vix volatility index hit 37.3 yesterday, its highest level since the Chinese currency devaluation of August 2015 and even greater than when US President Donald Trump was elected in 2016.

Warning bond and equity market sell-off has further to run as inflation fears build

The volatility has been triggered by fears of rising inflation in the US and a policy error from the Federal Reserve, which caused bond yields to widen to 2.73% on 29 January, the highest since April 2014.

Opportunities

Alex Scott, chief strategist at 7IM, said it was unlikely the sell-off would result in a recession as the global growth outlook remains healthy.

Scott, who has been holding 12% in cash and short-dated bonds, said attractive opportunities, which have been scarce due to high equity valuations and low volatility, may soon appear.

He said: "It would be extremely unusual to see a sustained or deep equity bear market against such a positive economic background.

"We have built up allocations to alternative strategies, which aim to be uncorrelated to the direction of equity and bond markets, and may be partially sheltered from an equity market shakeout such as we are now witnessing.

"For investors with a long time horizon and robust portfolios, periods such as this offer opportunity."

Peter Garnry, head of equity strategy at Saxo Bank, said the largest two-day sell-off since August 2015 was a confirmation of the end to low volatility.

"The low volatility regime is likely dead - 2017 and early 2018 were a crazy anomaly. So far the blow up is scary but has been relatively contained."

Daryl Liew, head of portfolio management at REYL Singapore, said the fall in markets had offered several attractive opportunities in North Asia such as China H-shares and Korea due to their valuations.

"We believe the current correction in risk assets is a healthy consolidation as the market needs to pause for breath after the sharp rally over the past year.

"We expect the markets to go through a stabilisation phase in the coming days and buying opportunities may emerge in selected markets."

Federal Reserve

However, some industry voices expressed concern over the increased potential for a policy error from the Federal Reserve after new Fed chair Jerome Powell was sworn in on Monday.

James Bateman, CIO, multi-asset at Fidelity International, said increasing rates too quickly or too slowly could "spook equity markets" and cause the rout to run further.

"As ever, the role of central bank head is to walk a tightrope between prudence and sentiment," he said. "Either overtightening or a delay in tightening that would suggest a loss in confidence."

David Baker, partner and CIO at Mazars said the "crucial" factor was how Powell reacted to the pull-back as markets were priced to perfection.

"Normally, a simple statement from the Fed chair indicating that accommodative policies will be a priority of the new leadership of the world's de facto central bank would calm markets.

"However, as Powell is very new to the job, we would not be too surprised if it took a little time for that statement to come."