The market opened yesterday to significant falls, after fresh turmoil in Greece’s negotiations with the rest of Europe increased the likelihood of the country having to leave the eurozone.
Following a drop of more than 2 per cent at opening, the FTSE 100 ended the session down 1.97 per cent at 6,620.48 points. The Euro Stoxx 50, which has plummeted about 4 per cent in early trading, closed the day down 4.21 per cent.
Stock market declines have continued this morning, with the FSTE 100 down another 0.93 per cent in the half-hour after the market opened and the Euro Stoxx 50 losing about the same. Both have recovered slightly from the early trading falls but are still in negative territory for the day.
The sell-off was prompted by the failure of the Greek government to reach a deal with its European partners at the weekend, leading to the European Central Bank (ECB) pulling the plug on the emergency funding keeping the country’s banking system running.
Greece looks certain to miss the €1.6bn repayment to the International Monetary Fund due today while it has announced that its banks will remain shut over coming days, in a bid to stop panicked savers prompting a severe run.
Performance of indices over 2015
Source: FE Analytics
Many investors had expected Greece to come to a deal with its creditors so the upset at the weekend took them by surprise. The question now is what impact an increasingly likely default and potential exit from the eurozone would have on the wider market.
This week’s market number may look bad when reflected in an investors’ portfolio – and no doubt there will be similar poor days in the weeks ahead – it’s worth keeping in mind that sell-offs are often limited in nature and the long-term investor is often proven right, if they can stomach the ride.
When asked which funds he looking at during the ongoing market turmoil, Informed Choice chartered financial planner Martin Bamford said he isn’t tipping any in particular but is calling for investors to have their eye on the long game, rather than short-term noise.
“I don’t think it’s possible to second-guess market events like these. The situation with Greece has been boiling away more or less constantly for years now, only coming to a head in the past few weeks. The market reaction has been as we expected and nothing too dramatic,” he explained.
“For this reason, we don’t favour any particular funds during particularly volatile times. The current mix of economic circumstances mean that equities and bonds are both equally as vulnerable during the next quarter. Cash is the only true safe haven there is but cash isn’t an investment so is only useful for very tactical allocations, which are impossible to time accurately.”
“When looked back at in the future, things like this appear to be just a blip on the charts. Investors only suffer losses when they sell after markets have fallen and then buy once markets have started to recover.”
Price performance of FTSE 100 since 1984
Source: FE Analytics
The above graph, which strips out dividends, illustrates Bamford’s point: on a long enough time horizon, even catastrophic market events start to look less severe, but only to investors who stuck with it. Of course, selling at the peak and buying just as markets bottom out would provide the absolute best possible returns – but timing the market is an extremely difficult task.
Bamford said: “Our advice to clients is to stay invested in their well diversified portfolios which are there for the long term. Knee jerk reactions this week would most likely end badly, creating more challenges in the future when it comes to the timing of re-entering the market.”
On the so-called ‘Black Monday’ of 19 October 1987, global equities crashed with the FTSE 100 dropping 10.84 per cent and even more the following day. This came after a few weeks of general weakness prompted by a soft landing in the US and Iranian missile attacks on US ships, while the UK had also gone through the Great Storm of 1987.
The turmoil of the time caused the FTSE to shed around 35 per cent in under a month and was incredibly painful for investors at the time. However, as the market recovered and time pressed on, the bruising falls of that time do indeed look more like a “blip”.
Of course, the more recent down markets such as those that came with the bursting of the dotcom bubble at the turn of the century and in the aftermath of the global financial crisis still have an intimidating presence on the above performance graph.
But the graph doesn’t take into account dividends earned, which smooth out the return profile. While losses to capital are difficult to go through, they are made somewhat easier to bear by the promise of income and compounding power of dividends.
The below graph shows the performance of the FTSE 100 since the start of 1986, with dividends reinvested. Its 1,359.74 per cent total return is much, much better than the 378.10 per cent rise in the index’s price performance over the same time frame.
Total return of index since 1986
Source: FE Analytics
When looked at like this, far-off events such as the 1987 crash appear far less significant. While the more recent down periods like the early 2000s, the financial crisis and the 2011 eurozone debt crisis still look serious, the income earned over the time does make them seem more palatable.
However, it must be kept in mind that taking this long-term view only works if investors can afford to ride out the rough times. And of course there are no guarantees just how long these periods can last – the Greek situation is far from resolved and there’s always the chance of an interest rate rise from the Federal Reserve by the end of the year.
Jim Wood-Smith, head of research at Hawksmoor, maintains that the current turmoil should be seen more as a reason to be investing in equity markets rather than pulling back from them.
“A good number of market commentators have been swift to pontificate. ‘Disgrace’ is one word that has been bandied about. I find it difficult to feel quite so strongly about something that caused a 2 per cent fall in the richly valued FTSE 100 Index (as at 08.44 this morning). European markets have fallen more, but they were always more vulnerable after their stupendous rises earlier in the year,” he said.
“I cannot help but think that this is an equity buying opportunity. It is in the rules of investment markets that things happen in the summer. It is also compulsory that every market fall can be fully justified: ignore previous years, this time it is different. This time this really is going to be the end. The world really has changed.”
Furthermore, Wood-Smith argues that this buying opportunity is likely to strengthen as more investors get nervous in the short term about the Greek debt problem. While there is a risk that uncertainty around Europe could hold back investment in the whole region, he does not think this likely.
“A solution will be found, a sticking plaster applied, the can kicked further along the road. If there were an actual, definitive resolution possible it would already have been found. And it is hardly going to come from a collection of countries and institutions that have so consistently proved incapable of looking after their own affairs,” he said.
“But it is so firmly in the interests of the wider eurozone to keep Greece on board that it would be extraordinarily careless if this whole brouhaha ended in divorce. And so I return to where we were: that this is a buying opportunity.”
“Having waited almost all year for just this to happen it would be rum to turn tail now and join the alleged rush to buy some assets of nil return. Perversely my hope remains that the buying opportunity gets even better. The best investments are the ones of the highest quality bought at the lowest prices; the only time when this happens is when irrationality prevails.”
Offering reasons why the Greek situation will look like a blip even in the near term, Wood-Smith points out that global growth appears to be in “rude health” with UK GDP expected to be revised upwards, US housing going through a strong period and China continuing to stimulate its economy.
All this positivity would have been reflected in equity markets over recent weeks while bond yields would have been expected to rise, where it not for Greece.
“Instead we have equity markets and bond yields falling in tandem. In previous financial parlance (which I loathe) this would have been described as a ‘risk off’ event,” Wood-Smith concluded.
“I am sure the right long-term reaction is to be reducing bonds and buying equities.”
