Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Dan Kemp of Morningstar Investment Management to talk about the FTSE 100.
Dan Kemp: Hello, Emma.
Wall: So, the FTSE 100 has come off about 300 points over the last month. What has caused this pullback?
Kemp: Well, the great temptation is to make up stories about what's led this. Really this is just the simple upsy-downsyness of markets. Sometimes they go up; sometimes they go down. The less people worry about exactly what's cause the fluctuations, the better really. You find a lot of financial commentators will try and drive you one direction to create a story about what's going to happen next. But really what we need to do is, compare the current price against the real fundamentals.
Wall: I suppose we have had so little volatility for so long that this couple of hundred point move feels seismic. But as you say, this upsy-downsyness of markets is totally normal?
Kemp: Absolutely right. The markets don't move in a straight line and they don't conform to particular stories or world views. And so, the real question for investors is whether we use this as an opportunity to buy some more to increase your investment, buy on the dips as people sometimes say; or whether you take this as a warning sign that maybe not all is well.
Wall: And which one should we do? Because even ignoring or taking into account this couple of hundred point drop it has been a very long and very profitable bull market, hasn't it?
Kemp: That's right. Well, the reality is that most asset classes look pretty expensive at the moment. And so, the danger of this buy on the dips approach is you are just putting more money in near what could be a top in the market. And that's why it's important to forget about what's just happened in terms of price movements, but really focus on comparing the current value, current price, to the underlying fundamental value and driving your capital to those opportunities that look the most attractive.
So, if we compare the FTSE, for example, UK equities with European equities, then both have dropped over the last month. The difference would be that we would see the UK as being more attractive on a valuation perspective over the long term than European equities. And so, incrementally, if UK equities get a little bit cheaper, then it may be worth continuing to put some savings in that direction. On the other hand, we'd want European equities to really get quite a lot cheaper before we are attracted to that market as a whole. Now, within that, there are always individual opportunities. Of course, there may be sectors that look attractive. But when we are talking about the markets as a whole, the bigger picture, then compare the current price to real long-term value.
Wall: Dan, thank you very much.
Kemp: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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