Volatile market is creating buying opportunities  

The start of 2016 has been one of the most tumultuous periods in recent years for UK markets, with the FTSE 100 Index briefly entering bear market territory in the middle of January. In this volatile environment, we are finding buying opportunities, especially in the small and mid-cap markets.

Amidst such turbulent markets, it is easy to imagine that short-term volatility impacts long-term company fundamentals across the board – which is not the case.  It is important to note the nature of the market’s volatility and, more significantly, what has been driving it.

While China’s growth has indeed slowed and this has unnerved investors, we believe that such concerns are well understood, largely discounted and, in any case, of less relevance to the UK than other economies globally.

A significant headwind for UK markets, and particularly for the FTSE 100, has been the prolonged falls in the price of oil and other commodities. Such falls are highly stimulative for the UK economy in particular given the high proportion of consumption within UK GDP.

I would be more concerned by a sharp unexpected increase in the price of oil. With some of the world’s largest oil companies and miners listed on the FTSE 100, including BP, Royal Dutch Shell and BHP Billiton, poor performance in these sectors has dragged the whole Index lower in recent quarters.

Furthermore, while Brexit is not our base case outcome from the referendum in June this year, uncertainty created by the very possibility of Britain leaving the EU is likely to result in further volatility, and opportunities, in the near term.

In addition to their higher weighting towards commodity-focused sectors, companies in the FTSE 100 tend to be more global in their reach, and this to some extent explains the recent relatively strong performance of UK large caps. Whilst the outlook for the UK domestic economy is uncertain in the short-term given Brexit worries, we continue to believe that the UK offers numerous attractions to international and domestic investors with a long-term mindset.  Any weakness in sterling will increase the attraction of UK companies – and their products- to overseas buyers.

With this in mind, recent underperformance by mid and small caps looks overdone.  Indiscriminate selling across all markets has undoubtedly provided good buying opportunities in certain sectors and individual stocks.

We continue to believe in the long-term attractions of the UK as an investment destination. Fears over Brexit and the global economy have combined to cause a healthy element of concern in the market. Markets are no longer euphoric and I’m finding a lot more value right now than I was six months ago. It could well be that there will be an even bigger buying opportunity in the coming months, but market timing is extremely difficult. I have been topping up exposure to the companies I have the most conviction in of late, including Victrex and Paypoint.

Mark Martin, manager of the Neptune UK Mid Cap fund

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