Timing critical when investing in stocks and ETFs

Is a stock market correction on the cards? Possibly - it all depends on whether the US Central Bank goes ahead with an interest rate rise.

I want to invest in stocks and ETFs but keep hearing about this looming stock market crash. I’ve been holding off for a couple of months, so when is it going to happen? TB, Dubai

Expert 1:

Gaurav Kashyap, head of futures at Axitrader

Financial markets find themselves in a precarious situation. 2016 has been a year filled with event risk – headlined by the Brexit vote and followed by the recently concluded US presidential elections. Considering both these “high risk” events, which throw all future economic predictions in doubt and we find ourselves looking at charts of some of the leading equity markets peaking near all-time highs. The S&P 500 is trading at record highs, while the FTSE 100 has crept off at October highs of 7,000+.

So amid all the uncertainty, why are the markets rallying? It is because of their addiction to monetary easing. With central banks in the midst of massive QE programmes for their respective economies, stock markets have been particularly large beneficiaries. Lending is cheap, markets are awash with liquidity – hence the overinflated gains in equity markets. I shall focus on western equity markets.

Your strategy of holding out has proven wise – and although the US market has been boosted by the Trump trade (optimism following the preceding uncertainty) – we expect the downsides in equity markets to take over through the end of Q4.

We have one more key decision due in 2016 which will drive global equity sentiment – the US central bank’s rate decision. It is widely expected the Fed will hike rates at its meeting on December 12-13 (markets are pricing a 93.5 per cent chance of a hike). If the rate hike does materialise, we can expect further weakness in US and global equity markets. The last time the Fed hiked was in December 2015 – and although markets hadn’t priced in such a move, the S&P sold off more than 8 per cent over the course of the next month. Traditionally, January is a hangover month – following the festive season in which retail sales are usually higher, the market goes through a correction – and this amplifies the move.

So, if the rate hike does happen, the S&P has the potential to test 1,980 levels in the next three months.

If we cross the pond and look at the European bourses, the FTSE could test the channel between 5,700-6,200.

Markets tend to react to such a large event, like the Fed’s rate decision by selling off and normalising after a few weeks. However, we expect the weakness to continue in global equities through at least the end of January.

Expert 2:

Tom Anderson, private client investment manager at Killik & Co

Markets will always fluctuate and not necessarily in the direction or sector one might expect. The start point should be understanding your investment objective and then building a diversified portfolio that has the pot­ential to achieve your goals without being too foc­used on any one area.

However, if you feel markets will sell off, the simplest way to anticipate this move is to hold some cash, but if you are wrong your cash will underperform as markets pick up unexpectedly. This is exactly what happened after both the UK referendum and the US election, even though these events were meant to spark sustained sell-offs. Switching in and out of investments could involve dealing costs, and these charges will reduce investment returns.

Most investors (as opposed to traders) have a reasonably long time frame, so they can afford to stay broadly invested while allowing the market to ebb and flow. While there’s nothing wrong with trying to pick up assets relatively cheaply, you will need to keep a close eye on their valuations and be brave enough to buy as others sell.

Therefore, I suggest that if you want to hold some cash, then do so – but don’t forget your overall objective. Overall, you have to understand the risk/return spectrum for each asset you own.

Next question:

I have several mortgaged investment properties in the US, eastern Europe, the UK and the UAE. The talk worrying me at the moment is of interest rate rises. Are my mortgages about to get more expensive? JH, Dubai

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