Buy the Dip, That Old Wall Street Favorite, Comes Under Scrutiny
(Bloomberg) -- “Buy the dip” has worked like a charm over the past decade, thanks to market-friendly policies from central banks around the world.
But last week’s selloff and surge in volatility have left many fund managers wondering whether they should stick with the age-old adage and keep loading up on stocks when they slump. There are fundamentals, such as robust global growth, that suggest the strategy will remain a money-making one; there are other developments, like central banks’ gradual withdrawal of monetary stimulus, that indicate the trade’s petering out.
Here’s how eight investment professionals see it.
“There’s sort of, ‘Everybody should buy a dip,’ which has become folklore in the markets now. I would say history doesn’t tell you buying dips is always the right answer,” Man Group Chief Executive Officer Luke Ellis said in an interview this week with Bloomberg Television. “When volatility increases you should run less positions, when volatility is low you can run bigger positions. It’s basically about taking the same amount of risk all the time.”
“The current market correction is a buying opportunity,” said Christian Hille, global head of multi-asset at Deutsche Bank AG’s asset-management unit, who manages 113 billion euros ($141 billion). “Macro and micro fundamentals remain strong with a Goldilocks-like environment -- not too hot, not too cold -- and moderate economic growth with low inflation, rising corporate earnings and low yield environment.”
Hille prefers equity over credit because volatility is moving from low into a medium-to-high range.
“We are in the buy camp,” said Michael Mullaney, director of global market research at Boston Partners, which managed $99.2 billion as of Dec. 31. “Nothing has fundamentally changed over the last two weeks except for the fact that stock prices are lower and we are able to buy good companies that were too pricey before.”
Mullaney said recent signs of wage growth “are not a bad thing as long as economic growth comes with it. The bull market can continue to go on for an extended period.”
“I don’t think it’s a question of ‘buying the dip,’ but rather what you are buying on the dip?” said Richard Bernstein, CEO at Richard Bernstein Advisors in New York, which has some $6.5 billion under management. “It makes no sense to me to buy the old leadership within the stock market (such as income, quality, defensives).”
Bernstein said “volatility always signals a change in market leadership” and that “the recent correction is a signal that the deflation/disinflation trade is over, and the market is recalibrating to a more inflation-oriented period. It’s not unusual -- late-cycle phases are typically characterized by production and labor bottlenecks and rising prices.”
“While there will still probably be scope to profit from ‘buying the dips’ until rates have been pushed higher, we believe that for many investors, who already have money invested in these markets, the better strategy will be selling the rallies in both equities and bonds,” said Ian Harnett, chief investment strategist at Absolute Strategy Research Ltd. in London.
“After a period of benign economic activity when inflation has been subdued and growth healthy, we worry that 2018 will see signs of more inflation as we get close to the end of the cycle and potentially slower growth if global activity falters,” Harnett said. “Having a more defensive mindset, therefore, is of the essence.”
Pinpoint Asset Management, which oversees $2.9 billion across China-focused and global hedge funds as well as long-biased funds, has yet to begin buying the dip, said Jennifer Wong, managing director of investor relations. The Hong Kong-based firm’s CIO, Wang Qiang, “thinks we haven’t reached rock bottom yet” as there could be more selling of exchange-traded funds, especially in the U.S., which may affect sentiment in Asia. The firm cut the net exposure in its China funds as a precaution against a potential U.S.-China trade war. Wong said earlier this month that Pinpoint’s global multistrategy fund added to its short positions.
The S&P 500 Index is likely to “retest” its recent low, Sam Stovall, chief investment strategist at research firm CFRA in New York, said in a note to clients.
“We think this will present a second buying opportunity, rather than usher in a new bear market, since we don’t see a recession on the horizon,” Stovall said. January housing starts and February consumer sentiment data coming next week are likely to be supportive of this bull market, he said, and the yield curve remains positively sloped rather than inverted.
Volatility can be scary, but long-term investors should see it as a friend that creates opportunity, said Rob Arnott, CEO of Newport Beach, California-based Research Affiliates. Still, a 10 percent swing isn’t huge, said Arnott.
“Buying the dip makes sense if you are bullish and wish you had more in stocks,” he said. “But if you have a cautious view you don’t want to buy the dip because you better have a sell discipline that tells you how to sell things.”
Arnott recalled Robert Kirby, the legendary trader and longtime Capital Group executive who died in 2005, often saying “portfolio managers like to take profits faster than Wyatt Earp in a gunfight.” That, said Arnott, “is the mindset of people who want to buy the dips or who want to take profits on a 10 percent or 20 percent rally.”
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