Volatility creates opportunity

Markets fell sharply yesterday and a number of factors have been blamed for this latest decline. But why are markets so volatile? Some believe that this correction is an attempt by markets to reach a more sustainable level.

This time some suggested catalysts have been:
- Higher-than-expected inflation in July in the US
- A significant fall in the Philadelphia Fed business confidence index (to a level not seen since March 2009) - Worse-than-expected US jobless claims this week
- A lack of market-friendly policy action from the meeting on Tuesday between the leaders of France and Germany Continuing fears over the strength of European banks and a possible freezing of interbank lending

But why are markets so volatile?
This correction is an attempt to return to a more sustainable level – investors believe the market rebounded too strongly after 2009 given new expectations for a long, slow, bumpy recovery. But, the market is still unsure whether it has done enough to re-price risk. In a low interest-rate environment, investors may have shifted their focus – a steady dividend yield is now relatively more attractive than the expectation of capital gains Investors are unsure what level of yield represents adequate compensation in a riskier world.

Market volatility can persist for a long time 
When investors are nervous, markets can remain volatile for a long time. This makes investing uncomfortable….but history suggests that these moments can be the best times to enter the market. The volatility we are seeing today is far less severe than what was witnessed after Lehman Brothers collapsed in 2008. If you can stomach daily volatility there could be some fantastic buying opportunities for investors with a longer-term horizon. The key is to look through the volatility and analyse the underlying value available in the market.

“We can certainly argue that equities are cheap.  Apart from the depths of 2008, there aren’t many periods in the course of the last 20 years where you could argue that equities were as valued as low as they are today.  I think, however, we need to recognise that while equities are cheap, they are cheap for a reason and they may stay cheap for a while longer.  I think there is going to be a growing demand from equity investors for jam today, rather than jam tomorrow. That means going forward there is going to be a greater demand for income from equities than there has been over the last 15 or 20 years. The face of equity investment may change, whereby investors who have pursued capital growth will be focused much more on the income generating powers of companies.”  
Dominic Rossi, Global CIO, Equities, Fidelity International

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