Volatile market conditions set to continue as euro leaders say no to eurobonds

Difficult market conditions are set to continue for investors with various experts offering different shades of advice on how to cope with such volatile times.

They point out that headlines make investors nervous but there are opportunities and more favourable news is often ignored.

‘As often happens at times of great uncertainty, natural value buyers will often sit on the side lines rather than try to catch the proverbial falling knife. Thin August markets compound the problem. Meanwhile, more favourable news, such as the July industrial production numbers, are being ignored,’ said Schroders' chief investment officer, Alan Brown.

‘In this kind of environment forced selling from leveraged investors and capital protection strategies can find no buyers leading to exaggerated price declines. While the risks of double dip have clearly risen and there is a danger that the market could create its own reality by hurting confidence, we expect that growth will continue, albeit at an anaemic level,’ he explained.

‘The developments in the Eurozone do continue to be disturbing. The political resolve to continue supporting the peripheral countries is clearly under pressure. Moves by a growing number of countries to demand collateral threatens to undermine the entire bail out package,’ he added.

Experts see investors moving to safe havens such as government bonds and gold and point out there is an element of panic rather than clear thinking and strategy.

‘The current equity market volatility is not about fundamentals, people are panicking. Luxury stocks that have performed well are now being sold as people try to lock in profits. However, it is important to note that while mood in Europe and US is in a doom and gloom phase, sentiment in Asia and other emerging markets, where a majority of the demand for luxury products is coming from, is still positive due to better economic growth and less debt issues. Current volatility could be an opportune time for investors interested in luxury, as valuations for luxury stocks are finally starting to look cheap,’ said Scilla Huang Sun, fund manager, JB Luxury Brands Fund at Swiss & Global Asset Management.

‘Overall, companies have reported good numbers for the first half of 2011. Demand for luxury products in quarter two has been very strong and the secular trend of luxury remains intact. No matter how volatile short tem financial markets are, the growing wealth and consumption in emerging countries is one of the big themes that will continue over the coming years. Luxury companies will benefit greatly form this trend,’ he explained.

‘If we can avoid a double dip recession, I believe it is a good time to start dipping your toes into the cold water. It is difficult to call when the bottom of the market will hit and it’s best to invest in several steps as markets will remain volatile, depending on news flow like macro numbers, political announcements etc. It is tough to predict and time markets, and when people panic, anything can happen,’ he added.

According to Nick Gartside, international chief investment officer for Global Fixed Income at J.P. Morgan Asset Management, the debate around ratifying the EFSF is intensifying and news flow around this could well flare up in the coming weeks.

‘In any event, the proposed size of the EFSF at €440 billion remains too small. The solution remains a common Eurobond but judging by comments from political leaders these are some way off.  Greece could also re-emerge as a topic for markets as we approach the next quarterly review in the autumn. Expect peripheral Europe to come under pressure as we enter September,’ he said.

‘Any sailor knows the doldrums are characterised by violent, sudden changes in weather. Markets could well behave the same way as we conclude the vacation season as the cross currents from macro issues, poor liquidity and investor nervousness collide,’ he added.

He believes that the overall backdrop of anaemic growth is a favourable backdrop for fixed income markets. ‘We're sticking with long duration positions. The clear message from the Japanese experience is not to fight low yield levels. We're also selectively starting to add to high yield. This is a market where differentiation between issuers is likely to increase. Where our team of credit analysts has high conviction we're adding names to portfolios,’ he added.

Evercore Pan Asset’s Investment Committee continues to advise against Euroland investment. ‘Germany is not yet prepared to stand behind all the debts and deficits in the zone, whilst there are still troubles in getting credible debt and deficit containment plans working in each stressed country.

China looks to us to be the cheapest major share market, and there are a few signs this week that the authorities are now worrying about growth instead of wishing to take every measure possible to slow the economy to get inflation down,’ said chairman John Redwood.

But despite the ongoing challenging market conditions clients of Barclays Stockbrokers continue to seek investment opportunities. In a difficult investment environment clients are seeing value in the market, with the majority of trades being purchases.

‘Last week we saw purchases steadily increase from an average of 65% across Monday to Wednesday to 70% on Thursday and reaching a peak of 72% on Friday (19th August). This compares to a summer average buy:sell ratio of 58:42,’ said Paul Inkster, head of Product, Barclays Stockbrokers.

‘Despite the turbulence, the use of Barclays Stockbrokers Price Improver®, the tool that ensures clients get the best prices, meant that last week four out of every five trades placed were executed at a better price than the London Stock Exchange's official best price,’ he added.