Of late it seems that for each mini-bull run experienced by equity investors, an abrupt fall is not far behind.
Last week the AmericaCentral Bank, after announcing a stepping up of its pace in quantitative easing only in November, suggested that it would now start tapering down this loose monetary policy.
This has been the catalyst for the most recent downturn in the UK market’s direction.
Although for the main part of this year markets globally have been experiencing a period of attractive gains, the recent correction is being interpreted by some as profit-taking. Historically, the most likely cause of share price rises would be an increase in earnings. Overseas earnings aside, in developed markets, as any significant revenue growth or increase in demand has yet to materialise, most gains in profits have come through largely as a result of cost-cutting. Nonetheless, these gains seen in earnings have resulted in shares undergoing a re-rating. This is the reason why many investors, whilst waiting for earnings to recover on a sounder base, have been prepared to console themselves with attractive dividend yields. With such an earnings recovery not yet in sight, and the supply of easy money being withdrawn, it seems this is what investors are focusing on as the reasons behind the market correction.
With the consequential return in market volatility, the lesson here for equity investors is to maintain a well-diversified portfolio.
Investing in stockmarket based investments may not be right for all investors. Consider carefully and/or seek professional guidance.
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