Stock market veterans: 'Falling markets present buying opportunities'
Investors have had a turbulent start to the year with the FTSE 100 index of the UK’s leading company shares falling. Reasons for the fall include tumbling oil prices and the slowdown of the Chinese economy.
Many investors will be feeling too scared to buy in case the market falls further and may even be thinking of selling up.
But some of the longest serving managers of investment companies – the oldest type of investment fund - explain that falling markets can lead to cheap opportunities to buy investments.
Speaking to the Association of Investment Companies (AIC), Angela Lascelles, manager of Value and Income Trust, says: “Current market conditions, where fear is causing indiscriminate falls in share-prices, provide opportunities to buy high quality companies on attractive valuations.”
See our guide to How to get investing in 2016 if you’re thinking of taking the plunge.
But Peter Spiller, manager of Capital Gearing Trust plc warns that investment company discounts remain “tight”. This means that investment companies aren’t trading at big knock down prices. He says: “Today discounts remain as tight as they have ever been, suggesting investors are not scared and are resisting selling.
“Unless the US goes into a recession it is likely that buyers will re-emerge before long, notwithstanding the fact equities remain materially overvalued.”
‘Our strategy doesn’t react to short-term noise’
Mr Forey adds that investors also shouldn’t underestimate the long-term game. He says: “Volatility [the extent to which the stock market rises and falls] is tough but as a long-term investor, our investment strategy does not react to short-term noise.
“We like to keep things for a long time and focus on buying stocks that will survive, keep growing and maintain their competitive edge.
“While emerging markets are going through a slow grind, it doesn’t feel like a crisis. In spite of the volatility, we’re still seeing really strong companies outperforming their competitors at a really good rate.
Ms Lascelles adds that low oil and commodity prices will “encourage growth” in the developed economies once the turbulence has passed.
See our Stock markets spooked: should you care? feature for more on this.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.