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Comment: Classic May pullback or more serious sell-off?

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Classic May pullback or more serious sell-off? Rupert Robinson (pictured), chief executive of Schroders Private Banking, assess the current stock market correction…

The big question at the moment is whether the correction we are seeing is a classic May pullback, or whether it’s the beginning of a more serious sell-off similar to the one we saw last summer, when markets fell more than 15 per cent from peak to trough on fears of a double-dip recession.
 
“We think the answer is the former as profit growth remains robust and valuations are attractive. However, in the short-term there are numerous headwinds that could cause markets to fall further. The impending end of QE2, Japan falling back into recession and monetary tightening in China fuelling fears of a hard landing are all casting shadows over investor confidence. With Italy being threatened with a downgrade and Greece heading dangerously towards default, the spotlight is firmly back on the sovereign debt crisis in Europe.
 
And, while everyone’s talking about the prospect of higher inflation, deflation remains a threat. If US 10 Year US Treasury yields fall below 3%, that would be a strong signal that the deflationary genie may have escaped the bottle.
 
“Investors should keep their powder dry for now and wait for buying opportunities when markets have corrected further. These days markets price in risk aversion much more quickly than they used to, and a level of between 5500 and 5700 on the FTSE 100 index would be a good entry point. On a longer-term basis, we still like Asian markets, but, as with the FTSE, would advise clients to be patient. Good long-term entry points for growth markets like India and China are circa 16000 on the Bombay Stock Exchange and 2500 on the Shanghai Composite A Index (more than 10 per cent below current levels).
 
“If one feels compelled to put money to work now, we favour large cap high quality global companies that are paying dividend yields over and above what one can receive on a 10-year government bond. Notwithstanding recent press coverage of high-profile sellers of gold, we continue to recommend bullion in an uncertain social, economic and political environment.”

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