Global equity markets are plummeting after ratcheting up strong gains this year, which presents a dilemma for long-term investors.
Should they take profits and position their portfolios defensively to guard against further falls? Or should they utilise the current volatility to buy on the dips? The third option is to hold tight, ride out the volatility and focus on the long term.
Several factors are contributing to the market sell off, from weak US jobs data and tech companies delivering slightly disappointing results, to the strengthening yen leading to an unwinding of the carry trade.
Yet sky-high valuations are also to blame for the correction, said Chris Metcalfe, chief investment officer of IBOSS, given that some share prices had reached “unreasonable levels”.
Jean-Louis Nakamura, head of conviction equities at Vontobel, agreed that the current repricing is “legitimate”.
“Earnings growth forecasts were probably excessive for 2025 and later and had to adapt from a more realistic baseline,” he said. The correction was “not completely surprising”, therefore, but it has “proved more brutal and concentrated in times than expected”.
While some investment managers see the sell-off as a healthy correction, other more bearish market participants will interpret it as “the start of something altogether nastier”, said AJ Bell investment director Russ Mould.
“Bears will say that someone, somewhere has lost $2.3trn on the Magnificent Seven since May, while the Nasdaq is just 5% above where it was in November 2021, before the AI hype machine moved into top gear.”
Adding to the bear case, legendary investor Warren Buffett has sold 50% of his stake in Apple.
Below, experts reveal whether they are bullish or bearish.
The bulls are treating the sell-off as a buying opportunity
Lindsay James, investment strategist at Quilter Investors, said the economic backdrop remains “reasonably solid” so she views the current period of “outsized volatility” as a buying opportunity for long-term investors.
“Current market moves in the US and Europe are well within the bounds of normal market volatility,” she pointed out.
The US stock market, meanwhile, looks worse than it actually is due to its concentration, with large-cap tech leading the major indices downwards.
“The MSCI USA Equal Weighted Index remained flat in sterling terms for the month up to 2 August. In contrast, the MSCI USA Index declined by 3.9% over the same period. This indicates that recent declines have been more concentrated among the Magnificent Seven stocks, as other companies, with more reasonable valuations and less ambitious earnings expectations, have been less affected,” James explained.
Euphoria over the Magnificent Seven is being “rightly tested”, she added, hopefully leading to a broadening of market returns.
“Whilst recent data has done little to calm investors nerves, we are at point in the economic cycle where central banks have maximum firepower to stimulate growth and are entering a phase where we would expect this to be gradually deployed to good effect,” she concluded.
Joe Bauernfreund, portfolio manager for AVI Global Trust, also sees the sell-off as a buying opportunity. "History tells us that as uncomfortable as such environments are whilst they play out, they also present highly attractive opportunities at prices few imagined possible just a matter of days ago. As such, whilst cognisant that we do not know precisely what is around the corner, we proceed forward slowly, with a balanced mix of caution and conviction," he said.
Furthermore, Nakamura warned that bearish investors who move out of equities now risk missing a potential bounce. If the prices of risky assets fall much further, the US Federal Reserve might intervene with an emergency cut, he said. Should that happen, “the rebound in stocks may then be as brutal as the recent sell-off, with sectors and markets the most supported by secular drivers and/or interest rates sensitivity (tech, AI, US, Taiwan, India) progressing the fastest”.
The bears are playing it safe
On the other hand, Metcalfe thinks that investors should consider increasing their exposure to fixed income. “Even before the recent sell-off in the US and the dramatic collapses in Japan and other parts of Asia, data suggested that higher-yielding assets were undervalued compared to equities,” he said.
“If market volatility continues, we might see a shift back into bonds, as they are currently acting as a safe haven. This trend is likely to persist if equities remain unstable, providing a more secure option for investors during these turbulent times.”
Other parts of the market have held up comparatively well, namely gold, value stocks, defensive sectors and markets driven by their own monetary cycle, such as China.
Metcalfe warned, however, that “historically, in times of crisis, investors end up selling what they can rather than what they want to, which might eventually affect gold as well”.