With global stock markets continuing to react with high volatility to news flow on the major issues I have been highlighting for some time (trade wars and Brexit), some may be thinking it is a good time to buy cheaper stocks. Certainly the overall net result of the markets jitteriness has been something that might be classified as a ‘bear’ market. The accepted definition of that is a drop of more than 20% from the highest point.
If you are buying individual stocks and shares yourself, or investment trusts (where one would expect discounts to be widening), you might find some undervalued examples where the price has been driven down by the sentiment of the market which can be quite indiscriminate and not by the fundamental valuation characteristics of the stock in question. By characteristics, I mean the probability of good dividends or real business growth funded from successful trading, not borrowing (as always).
If you own funds as I do, you will have tried to select managers who will know well when to make such calls for you. I always like to have some funds in my portfolio where the overall objective and asset allocation strategy is enhanced by the manager’s personal ability to buy and sell shares at the right price.
On the broader question of whether or not the market is cheap enough to add cash or still so risky that you should be raising cash, I remain reluctant to put money into any sort of asset class from cash but think that current valuations mean that selling is only appropriate if you have near term cash flow needs. In other words, my mood is one of ‘do nothing’
This is because I don’t really see that the market has come down enough to reflect the risks we have been living with for some time, which are mainly political. I think the market is saying it fears those risks, but it has not fully capitulated which needs to happen so that when the risks reduce or even disappear, share prices can move up sharply as they usually do. In the case of the Brexit risk, that could happen if there was a surprising agreement to a second referendum and opinion polls anticipated a Remain result. That would probably benefit UK and European funds.
However, I don’t see a speedy resolution of the world trade wars being driven by the US President. Perhaps Mr Mueller will supply us with that?
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