While the recent equity market selloff has caused meaningful pain, it is likely just a stumble rather than the start of a deeper, prolonged decline, says Jason Todd, co-founder and CIO of Ten Cap.
"We think the recent correction is more of a blip than a major trend, but it’s clear that the market remains in a period of heightened uncertainty,” he says.
While the risk of a US recession has been overstated, Todd says that without greater clarity on trade and growth impacts, markets will likely continue to ebb and flow with political and economic developments.
"The path ahead will remain bumpy as we await more transparency on key factors like trade and economic growth. Until these uncertainties are resolved, it's tough to predict a clear, sustainable upswing," he says.
Ten Cap’s CIO sees a potential near-term floor for equities, but he does not believe stocks are yet cheap enough to absorb any further negative news.
"A sustainable recovery will require greater transparency on where US growth is heading, or for the Federal Reserve's stance to become more explicitly dovish which, unfortunately, might require more weakness in economic growth."
Despite the turbulence, Todd is confident that the February-March correction will eventually be viewed in a similar light to other equity market corrections, however investors should be prepared for continued volatility.
"Until we get a clearer picture on US growth, and how global trade dynamics evolve, the market’s recovery will remain challenging.
“The potential for ongoing macro-economic disappointment means investors should be prepared for volatility and range-bound markets. As a result, stock-specific fundamentals are increasingly important, while good value and a strong earnings outlook will remain important drivers of returns.
“Given the uncertainty in broader economic indicators, it’s crucial for investors to focus on individual company performance, as this will likely dictate market success more than macroeconomic trends.
“Investors should aim to identify companies that are well-positioned to weather economic turbulence and continue to show resilience in their earnings growth.
“We expect small and mid-cap stocks to outperform large caps, and value/cyclical stocks to provide the largest upside through year-end. That being said, investors should be prepared for occasional market corrections and remain focused on the long-term outlook for these sectors to realise their full potential," Todd says.
