Since the turn of the year, the FTSE 100 has slumped by around 6%. That’s disappointing and during this time it entered bear market territory for a short period, having fallen by over 20% since its all-time high. As a result, many investors are feeling nervous, uneasy and even fearful. However, for Foolish investors, now is one of the most opportune moments to buy high quality companies at discounted prices.
Certainly, share prices could fall further and a key reason for this is the increase in interest rates in the US. Although the Federal Reserve increased them by just 0.25% last month, the rise signalled the end of an ultra-loose monetary policy period that had lasted since the Credit Crunch. As such, the market is now beginning to factor-in higher borrowing costs and the potential for more constrained economic growth in the US.
Furthermore, the slowing of the Chinese economy continues. Although investors have been well aware of China’s soft landing for a number of years, it seems as though the market has suddenly realised that the world’s second largest economy was the major reason why the developed world came out of the Credit Crunch so quickly.
After all, with Chinese growth being strong in recent years alongside anaemic European growth and modest performance from the US and UK, China has been the world’s standout economy when it comes to GDP performance. Looking ahead, further deterioration on this front could cause share prices to fall further.
Long-term strategy
While there’s the potential for short-term pain, there’s also the prospect of major long-term gains. That’s because when share prices fall, the risk/reward ratio moves further in the investor’s favour. Certainly, things may look bleaker now than a few months ago but the reality is that the vast majority of UK-listed companies continue to have very upbeat future prospects and now trade at even more appealing valuations. In other words, there’s a wider margin of safety for buyers now.
Furthermore, the reaction to a US interest rate rise and China’s transition towards a more consumer-focused economy appears to have been overdone. Undoubtedly, the future is uncertain, but China was never going to remain a capital expenditure-led economy in perpetuity and likewise, the US was never going to keep interest rates low forever. Therefore, an over-reaction to the current outlook by the market presents an opportunity to buy low and sell higher further down the line.
Although buying shares right now may seem like the wrong move as it could lead to paper losses in the coming days, weeks and months, the reality is somewhat different. In fact, most investors would agree that buying high quality companies at low prices, holding them for a period (while picking up dividends) and then selling up for a higher price is the ideal way to go about investing. With the FTSE 100 at its lowest level in over three years, this could be the perfect opportunity to get that process started.