Global stock markets have been enduring significant volatility in recent months because of turmoil in the credit markets. Such sharp movements in share values can cause some nervousness among investors. However, we believe the medium term outlook for shares remains positive and that these periods of volatility can provide opportunities for long term investors.
Edward Bonham Carter, chief executive of Jupiter Asset Management, said: "Stock markets are volatile by their nature and in recent years we have enjoyed a rare period of unusually low volatility - until the emergence of the subprime credit crisis in the second half of 2007.
"As the subprime crisis has emerged in recent months, fears over the outlook for Western economies have grown as banks have become more reluctant to lend to businesses and consumers. These concerns have gathered in intensity as negative economic indicators and corporate news, including the takeover of US investment bank Bear Stearns by rival JP Morgan, have emerged. In addition, investors are grappling with uncertainty over the extent to which central banks can cut interest rates in the face of inflationary pressures from rising food and oil prices.
"We have seen that Central Banks are prepared to react to these concerns, with the US Federal Reserve cutting interest rates by 0.75% to 3.5% earlier this year, as well supporting market stability with additional measures. Global central banks will continue to put in place co-ordinated measures to weather the seizure in credit markets.
"Stock markets are likely to remain volatile for some time yet as investors look for signs that these rate cuts are having the desired effect on economic growth. Sentiment is also likely to remain volatile until they are confident that the banks' exposure to the credit crunch is completely understood. This could take a number of months.
"While these periods of heightened market volatility can be destabilising, they can also provide buying opportunities for long term investors as markets tend to focus on bad rather than good news and potentially exaggerate their effects.
"I continue to believe that stock market fundamentals remain positive, albeit dampened by the prospect of slower economic growth and tighter lending conditions as banks strengthen balance sheets. Our view is that while economic growth will slow, the global economy is unlikely to go into recession this year and that the inflationary impact of higher food and oil prices will be limited as they are unlikely to result in higher wages due to strong competition in labour markets.
"We should not be surprised to see further earnings downgrades by companies as the economy slows, particularly in certain financials and in those companies and sectors exposed to over-stretched consumers. Nevertheless, corporate balance sheets are, on the whole, in sound condition and share prices of many companies are already discounting the slowing outlook for earnings.
"Assuming central banks continue to respond to the slowdown in growth and the major economies do not go into a deep and prolonged recession, equities represent attractive investments relative to other asset classes. So, I believe investors should hold their nerve and view sharp downturns in share prices as a long term buying opportunity - with the proviso that stock selection remains key."
NOTE
Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM) are both authorised and regulated by the Financial Services Authority and their registered address is 1 Grosvenor Place London SW1X 7JJ. They are both subsidiaries of Jupiter Investment Management Group Limited and the group is collectively known as "Jupiter". The above commentary represents the views of the Fund Manager at the time of preparation and may be subject to change. They are not necessarily those of Jupiter and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.