While money managers are split as to whether February's market dip was the time to add risk to portfolios, they agree subsequent dips — and the anticipated return of volatility — will be altogether more attractive.
From Jan. 31 through Feb. 9, the S&P 500 fell 7.2%, following a strong January with gains of 5.6%. The MSCI Europe index lost 6.9% compared to January's 1.6% return, and the MSCI Emerging Markets index lost 7.6% over that early February period, vs. 7.8% growth in January.
Sources largely attributed the dip to technical, rather than fundamental, factors and a volatility shock. They cited concerns over rising inflation in the U.S. in particular, jitters over central bank policy changes and volatility-focused strategies.
"The recent sell-off appears to have been a volatility shock," said Tristan Hanson, multiasset fund manager at M&G Investments in London. "Asset price movements can cause investors to start looking for reasons to explain market reactions, such as last month's upside surprise in wage inflation, but it is impossible to know with certainty why markets move when they do."
Whatever the reason for the sell-off, some managers agreed that what mattered more was the opportunity afforded by it to long-term investors, providing an entry point for investment.
And they agreed that the sell-off was probably the start of an altogether more exciting time for active stock pickers.
BNP Paribas Asset Management executives have embarked on a "road map so far this year … to gradually add to risk on dips," said Guillermo Felices, head of research and strategy in the firm's multiasset, quantitative and solutions unit in London. Executives are operating on a central scenario of continued robust growth and contained inflation, an environment that is "typically good for risky assets. Along that macro path you can have setbacks, shocks that are sometimes unrelated to those macro assumptions, and those are the ones that give you opportunities," Mr. Felices said.
Mr. Felices did warn, however, that 2018 will be a difficult year. "The difficulty is summarized by the tension between two forces: a global economy that is still doing well — with robust growth and inflation that is well-behaved; and on the other hand a rally in equity markets that has lasted for a long time."
He added: "We need to be very careful about two things: hedging our exposure to risk if (there is a) material risk we need to consider, and being a bit more nimble or active in managing our risk exposure."