Investors who went on holiday leaving their positions open and, after a few days of happy digital disconnection, decided to check the start of the week on the stock markets from their hammock, would probably choke on their mojito. The disappointment (as long as they are bullish investors and not short-term investors, those who profit when everything falls) has been losing steam, almost leaving what happened as a bad dream. But the emotional roller coaster has turned its gaze on some of the fears that the market has been dragging along for months and that until now it had chosen to ignore, including the possible recession in the United States or the bursting of a supposed bubble of technological stocks linked to artificial intelligence. Despite the intensity of the shock, the swings have hardly affected the year’s profits, still very positive for the stock markets, but they have acted as a reminder that the increases are not infinite, and they open the door to a new scenario: the beginning of an era of high volatility.
The VIX index, the main measure of volatility in global stock markets, rebounded on Monday to levels close to those before the pandemic, and although it has since collapsed by half, it remains at historically high levels. Is it negative that there are sharp movements up and down? Not necessarily. In summer, when trading is usually lower due to the summer break for traders, it is easier for scares to occur, sometimes amplified by automated programs that buy and sell shares without human intervention, which fuels panics and stock market euphoria unrelated to the real state of the economy or companies.
“This type of volatility can create attractive trading opportunities,” say analysts at asset manager Pimco, who expect further shocks in the remainder of the year in an environment of high sovereign debt, high interest rates and US elections. “We find bonds from countries such as the United Kingdom, Canada and Australia attractive.” due to the downside risks to economic growth, the improvement in inflation prospects and the way in which interest rates affect the economy more directly through mortgage structures,” they add. The search for opportunities after the storm is the manager’s watchword when a profound change of direction in the market is not foreseen, as is the case, although experts also advise incorporating elements of protection into the portfolio against new upheavals.
ASML, among the favorites
To protect itself from fluctuations, Swiss bank UBS cites among its favorite stocks the Dutch chip firm ASML, the British information and analysis provider RELX, and utilities (companies that safeguard and operate public service infrastructures such as water, electricity, gas or telecommunications) European companies such as Redeia, E.On, Engie, Enel, Iberdrola or RWE, which also tend to distribute high dividends.
“Long-term investors should not worry too much,” says Leopoldo Torralba, an economist at Arcano, in the face of a US economy that is still growing at more than acceptable rates (of 2.8% annually in the second quarter), and a Federal Reserve with room to cut rates if things suddenly got worse. In his opinion, it is not time to turn to stocks traditionally considered defensive, such as pharmaceutical companies, utilitieseducation and consumer staples companies, because the worst may be over. “The sharp falls have already occurred, and one can miss a good rise in the medium term. I would bet on a recovery, and in the short term, uncontrollable randomness.”
SAP and Capgemini
Technology stocks have been among the biggest names singled out for their high valuations, but Deutsche Bank analysts believe there are reasons for the correction to end, and have therefore raised their recommendation on the sector from sell to neutral. “We believe current valuations are fair and earnings estimates are more realistic, but caution should be exercised against further earnings declines, as earnings growth for fiscal year 2025 is expected to be high (33%).” The German bank sees opportunities for selective purchases, and mentions three names: ASML, the second largest company in the Eurostoxx 50 by market capitalisation (over €313 billion), is back on the scene, with a 50% upside potential, along with business software developer SAP (20% upside) and French IT services consultancy Capgemini (40%).
UBS shares the renewed optimism towards the sector. “Tech fundamentals remain strong, while valuations have now reset to the downside,” it notes in a recent report. The situation is reminiscent of 2015, when a 10% correction on the Nasdaq was followed by large gains in the following six months. To avoid further negative surprises, it believes that investors should focus on companies with solid balance sheets and a history of earnings growth, as well as those exposed to structural growth segments, such as artificial intelligence. It also calls for broadening horizons and studying possible investments in Chinese AI firms, without naming names.
When talking about technology stocks, it is inevitable to refer to the so-called magnificent seven. None of them has been immune to the summer correction. And despite the recovery in recent days, they are still trading below their highs: Nvidia is worth around 20% less than the peak at the close of a session, reached on June 18; Amazon and Alphabet 16%; Microsoft 13%; Apple 10%, and Meta 5%. Tesla, with a more different business model, had its best moment longer ago, in November 2021, and has lost almost 20% this year. In other words, those who believe that the full potential of this group of stocks has not yet been seen and are betting that they will be able to monetize artificial intelligence, may now have a more attractive entry point than a few weeks ago.
However, given the high concentration of the market around these technological giants and the risks that this entails, portfolio diversification is one of the lessons learned from the recent shock. “The overwhelming euphoria surrounding Artificial Intelligence, which has almost exclusively explained the rise of the US stock market indices over the last nine months, has suffered a first setback. Investors are beginning to rediscover the old, but not obsolete, virtue of diversification,” says Björn Jesch, Global Investment Director at DWS.
Consumer giants for conservative portfolios
The US elections on 5 November are another element of destabilisation. And Bank of America expects the volatile environment to continue before the polls: it recalls that in election years the VIX usually experiences increases of around 25% between July and November, thus replicating the market’s growing political uncertainty. “The best hedge is to own high-quality stocks. We use the stability of earnings and dividends as our key measure,” they point out.
To combat this, they have launched their own list of 42 recommended stocks to help investors “sleep well at night.” These include consumer giants such as the American hypermarket chains Costco and Walmart, beverage manufacturers Coca-Cola and Pepsi, household products firms Procter & Gamble and Colgate, pizza restaurants Domino’s and coffee shops Starbucks. Also health companies such as ResMed, West Pharmaceutical, Quest Diagnostics and Medtronic, and REITs (companies that invest in real estate) such as Digital Realty and Essex Properties.
In the report, titled Hello volatilityanalysts at the American bank warn that it is risky to try to buy and sell by guessing the right timing The S&P 500 is a market-leading index. And they use a very revealing piece of data to support their view: while investing in the S&P 500 and selling the next day has a 46% probability of losses (practically like flipping a coin), staying invested reduces those chances to 5%. “Selling in panic can be a bad idea, because the worst days are often followed by the best,” they warn. They use another historical reference to calm investors: since 1930, the S&P has suffered 98 corrections of more than 10%, which has not been an obstacle to its return since its conception of 25,000%.
The investment horizon seems to be key when choosing between making decisions now or ignoring the noise unleashed by the brief financial storm. One of the messiahs of long-termism, the famous investor Warren Buffett, has been one of those who has contributed to raising the concern by getting rid of half of the Apple shares it owned. It still has the other half left, and it does not seem that he is one of those who is scared by a one-off stock market crash: in one of his famous letters to shareholders, in 2015, he alluded to the danger of confusing volatility and risk. “They are far from being synonymous. It is true, of course, that owning shares for a day, a week or a year is much riskier than leaving funds in cash equivalents. However, for the vast majority of investors, who can – and should – invest with a horizon of several decades, falls in share prices are not important.”
Not only are they not relevant: for many investors they are the best buying opportunity, although as Robert Kiyosaki reminds us in his book Rich Dad, Poor Dadfor others it is not so obvious to dive into the market waters when they are troubled, and their more emotional side betrays them. “Why will some small investors always be poor? When the supermarket has a supply, let’s say of toilet paper, the consumer runs to stock up. When the stock market has a supply, more commonly called crashthe investor runs away. When the supermarket increases its prices, the consumer goes to buy elsewhere. When the stock market increases its prices, the investor starts buying.”
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