Investors still too bullish
Investors remain excessively bullish about short-term stock market returns despite the recent correction, warns Argonaut European fund manager Barry Norris.Norris, manager of the £380m ResolutionAsset Argonaut European Alpha Fund, believes the eight-month run of positive market returns has lulled investors into excessive risk taking and cautions against assumptions that markets are immune to further set-backs.
Norris warns that corrections will increasingly become part of the investment landscape over the coming months. “Many companies are currently experiencing extremely buoyant trading and we sense that investors are not at all worried about how long the party will last. The reality is that nobody has much visibility about the duration of the economic cycle and macroeconomic risks in equity investing are never too far away.”
To guard against major losses, he advises investors to adopt a more cautious stance by moving money into more defensive stocks, particularly those with strong balance sheets and good dividend growth. These value stocks, says Norris, can act as lifeboats in turbulent markets, as evidenced by the performance of value-orientated funds during the correction.
Despite his current caution, however, Norris – who took out a put option on the DJ EuroStoxx index at the start of February to hedge some of his market exposure - believes that future corrections will throw up a host of attractive buying opportunities.
He says: “Whilst there is a very real concern that profit margins are close to peak, the surprise story in Europe this year could well be balance sheets, which are exceptionally strong and can be used more imaginatively by company management to reward shareholders”
“The key points to remember are that the market remains vulnerable to set-backs and that corrections, far from being anomalous, will be a feature of the landscape over the next couple of months. But on the flipside corrections create buying opportunities – I tend to get more bullish when markets fall.”