What goes down must go up? Investing in crashing markets

Published June 21st, 2016 - 11:57 GMT
It’s always difficult to determine the bottom of a market. (Shutterstock)
It’s always difficult to determine the bottom of a market. (Shutterstock)

When funds are flowing out of a market in bulk and the market is feeling the most pain, that’s probably an indication it’s time for you to invest there.

It’s not hyperbole — it’s the opposite of emotional investment and it’s meant to leverage risk and volatility.

According to Brendan Dolan, regional director for Middle East and Africa at Old Mutual International whose asset management arm oversees £26 billion in assets, when markets feel the worse, investors should consider going in.

“When there are massive flows going in, that’s an indication to tell you that it’s probably time to start coming out [of the market]. When the flows are the biggest going out and you feel the most pain, that’s probably an indication that it’s time to maybe look at going back in …

It’s always difficult to determine the bottom of a market. One area to look at is the flows in and out — when sentiment is really bad, that’s generally buying opportunity. Often a good way if you’re not sure about the bottom of a market is buy on the dips and … average out,” Dolan said.

Don’t believe him? Take George Soros as an example. The prominent investor and chairman of Soros Fund Management recently made headlines by buying shares in gold mining companies, and more notably, betting against the US economy.

By that logic, the sterling could be a worthy investment opportunity. The sterling has been depreciating against the US dollar and reaching new lows as more polls come out showing that the ‘Leave’ campaign (voting for Britain to exit the European Union) is gaining momentum.

“If it’s a Leave vote, you’d expect markets to weaken in the short term, but a lot of that can get built in the markets already. We’ve seen that on the currency, with the sterling weakening as it goes toward the vote, so people will take positions around that. They’re trying to hedge for both,” Dolan said.

The referendum, coupled with dovish remarks from the US Federal Reserve, volatile oil prices, and the US presidential elections, has created an environment of uncertainty for investors around the world. This also resulted in investors being overweight on assets they perceive as safer options like gold and cash.

According to the Bank of America Merrill Lynch’s latest fund manager survey, investors have “a mountain of cash,” with cash levels rising to 5.7 per cent in June — the highest since November 2001.

Dolan pointed that the risk aversion sentiment is also forcing investors to lower their yield expectations.

“Getting double digit returns will require quite a lot of risk nowadays, so we’re seeing from our side the expectations coming down particularly over the next 12-18 months where the expected returns are more conservative.

In a lot of portfolios that we see, if [investors] are able to get single digit growth through this year, they would be very happy … so if they end up at the end of the year with a half-reasonable single digit return, they’d be comfortable with that,” he said.

By Sarah Diaa


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