With the FTSE 100 up and down like a yo-yo in recent days, investors could be forgiven for feeling confused over when to venture back into the market.
For anyone thinking of braving some stock buying, strategists at Morgan Stanley have returned to their history books to draw up some lessons from the 1994 and 2004 corrections.
In a note from the investment bank's equity strategy team entitled "When should we buy?", they explain that in those last two cases "markets struggled and it was difficult to make money" but they do have some lessons to share.
Namely:
1. Expect several quarters of struggling equities but with a choppy profile.
"The 1994 episode lasted 13 months with a 17% peak-to-trough correction. 2004 involved a 2-quarter 8% correction. Both 1994 and 2004 saw periods of alternating sell-offs, rallies and range-bound markets."
2. Sector performance broadly good among defensives, poor in financials & TMT.
"The biggest outperformers in both periods included energy, pharma, materials and some staples. The biggest underperformers were in the TMT and financials groups. Commodity related groups performed strongly."
3. You had to buy the dip eventually.
"Following both the 1994 and 2004 corrections equities enjoyed several strong years. With more clarity on the outlook for policy and growth and a re-basing of expectations, equities may offer such a buying opportunity later this year. The current dip may turn out to be worse as 1994 and 2004 were relatively normal cycles and this one may not be if sovereign trouble escalates and China growth disappoints as some bears expect (not us)."
Morgan Stanley's Ronan Carr concludes that it is too early to buy and that the current correction phase is likely to last a few months or even quarters longer. "We would like to wait until either fundamentals improve or our valuation and sentiment models give buy signals," he adds.
Events and changes they are waiting for include an easing in Asian inflation fears and some re-basing in growth expectations. Carr adds that his team is watching out for a buy signal.
"Such a buy signal could come through a combination of lower equity prices, lower bond yields and/or more signs of capitulation in sentiment or liquidity indicators."
