Look past fear to profit from opportunities

With fear and contagion from 2008 still top of mind, the markets have reacted to the European debt crisis with panic, leading to increased volatility. The rest of the world’s economies are however showing signs of improvement. The recovering global market, in combination with opportunities created by the European crisis, provides a silver lining to the recessionary cloud that has overshadowed investors’ outlooks for the past three years.

Contrary to market behaviour, the environment is not a bad one for risk assets

Juan Nevado, Fund Manager from the Macro Investment Team at M&G Investments (the global investment arm of the Prudential Group) says the current environment offers certain opportunities. “From our dispassionate observation of the global facts, we can say that in spite of Europe’s recessionary woes, this is in fact not a bad environment for risk assets, despite what the markets seem to be discounting,” he commented.

Signs of global recovery give hope, but investors should take a long-term view

The rest of the world currently looks a lot better than Europe and is in a slow to mediocre growth environment, which is not the same as a recession. Examples of positive economic data are that:

· Savings rates in the US and UK have stabilised.

· Consumers have reduced their debt, are able to service their debt and are spending.

· “Real” interest rates are negative.

· US employment is growing slowly.

· Inflation expectations are low, while core inflation globally is still less than 2%.

Because there still is volatility in the market, investors should however be cautious.

Long-term investors can profit from discounted European shares

Typical of emotion-based investing, where people react in fear or greed, many investors have steered away from European risk assets and decided to park their money in cash.

Nevado highlights that shares of some of Europe’s top companies are currently selling at a significant discount to their business value. Patient investors with a long-term focus who can look past fear can profit from this uncertainty.

Look at the facts, instead of reacting to forecasts or fear
Nevado concludes that to recognise and use these opportunities, investors should not react emotionally or rely on forecasts because economists often get these wrong. Investors must rather stick to the facts, like market pricing and the real yield. By applying such sound thinking, experienced investors will be able to take advantage of the market’s fear or greed, instead of jumping on the emotional bandwagon and bearing the consequences.