Investment Clock insights

Buying the dip gradually over several weeks


Hiroki Hashimoto

12 February 2018

Investor sentiment had been in euphoric territory throughout January and when US company directors turned sellers during the January rally we lightened our equity exposure in our multi asset fund range. The spike in volatility and the speed of the sell-off has sent our sentiment indicator to the lowest level since August 2015 when investors were panicking about a devaluation of the Chinese currency (chart 1). 
With the US Federal Reserve (Fed) Funds rate still below the rate of inflation (chart 2) and the second and third largest central banks in the world still printing money, we think it’s too early to worry about recession risks. We’re gradually adding back to equities at lower levels in our multi asset funds, especially in growth-sensitive emerging markets. 
Our research suggests that when the fundamental backdrop is positive for stocks, it is almost always good to buy during market panics. However, it is prudent to average in gradually over several weeks as such large shocks tend to be followed by an initial period of relatively wide trading ranges before recovering.

Investor sentiment had been in euphoric territory throughout January and when US company directors turned sellers during the January rally we lightened our equity exposure in our multi asset fund range. The spike in volatility and the speed of the sell-off has sent our sentiment indicator to the lowest level since August 2015 when investors were panicking about a devaluation of the Chinese currency (chart 1). 

With the US Federal Reserve (Fed) Funds rate still below the rate of inflation (chart 2) and the second and third largest central banks in the world still printing money, we think it’s too early to worry about recession risks. We’re gradually adding back to equities at lower levels in our multi asset funds, especially in growth-sensitive emerging markets. 

Our research suggests that when the fundamental backdrop is positive for stocks, it is almost always good to buy during market panics. However, it is prudent to average in gradually over several weeks as such large shocks tend to be followed by an initial period of relatively wide trading ranges before recovering.

Chart 1:  Sentiment Index and Global Stock Prices

Chart 2:  Real Fed Funds Rate vs 2% Recession Trigger Level

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.