Is it time to buy equities?

Investors are worried about the sell-off we are seeing in the equity markets because of the negative data coming out of Europe. They are worried about the possibility that Europe slips back into recession. However investors are not factoring in the following:

• The sell-off is not worse than the previous sell-off we had a few months back – the problem (or what is causing greater concern) is the fact that the correction is happening very close to the previous one. Historically, there is a longer time period between one correction and another. But then again, this correction (so far) is not worse.

• One can argue that Europe never really moved out of recession and the probablity of an ECB intervention which has a positive effect on the markets is greater.

• The probability of a black swan event (causing a crash in the markets) is very low.

• The fact that volatility is increasing is not a concern. Investors are worried of the ‘higher’ volatility because they got used to not having it. We have been in a period of very low volatility. However, the recent increase in volatility we have seen in the markets in reality is in line with historical averages.

• The weakness in the Euro will benefit European companies going forward.

• The weakness in the price of crude oil will help companies going forward.

• We are confident the ECB will move towards an US form of quantitative easing if the situation in European worsens – a very good positive.

• It is true that the ECB has failed to convince investors in the past. Though ‘this time it is different’ because Germany is starting to feel the pain. Now that Germany is also feeling the weakness from the rest of Europe, the probability that the ECB will act in favour of quantitative easing is greater.

So why are investors worried? Investors trade on emotions and in a sell-off they do not weight the positive and negatives before taking a decision. They just focus on the money they are losing. This is where we have to be patient and take advantage of this situation by being contrarian to these investors and take advantage of the weakness in the market.

Bottom line is that the markets sold off creating attractive entry points. Is this a bottom? That no one knows. But what we do know is that we are close to the bottom of the previous sell off creating an attractive entry point. We are confident the ECB will act if the situation worsens and the weakness of the Euro is a positive for European companies. The probability of markets moving upwards at this point in time is greater than them moving downwards.

Having said all this, my opinion is to start picking up the pieces and positioning portfolios with exposure to the market. The lessons learnt for investors that are already positioned in the markets is that a ‘profit is a profit’. Volatility will increase going forward so technicals should start coming into play. When we are in an overbought situation, it is time to start reducing positions (not all). But this form of discipline is important to adopt to portfolios.

Remember that when things are bad, analysts start to look at the future and take advantage of depressed prices. It is in these times of ‘opportunities’ that portfolios should be positioned to take advantage of better days to come.