New Year Pessimism Is The Buying Opportunity Of The Year

Fund managers typically greet the New Year with public displays of optimism, beguiling investors with talk of the money-making opportunities that lie within their grasp. This year is different. Even the professional optimists are sounding pessimistic, warning of a bumpy, violate and uncertain road ahead. So why the sudden outbreak of mass honesty? Do they know something we don’t?

New Year, new danger

Actually, they know exactly what we all know. They know China is slowing, the US Federal Reserve is hiking, and Europe and Japan are growing (but only due to rampant stimulus). They know, as we do, that emerging markets are plunging (especially commodity-dependent countries like Russia and Brazil) and the Middle East is tearing itself apart.

They also know that the FTSE 100 fell 2.7% in 2015 and this makes the fabled stock market wall of worry look particularly daunting today. The pessimism is contagious and the first trading day of 2016 duly vindicated the pessimists with the worst stock market start in 16 years. The FTSE 100 fell 2.39% to 6,093, driven by more bad news from China and poor global manufacturing figures.

Down, down, down

There were some big losers on the FTSE 100 with Anglo American, last year’s biggest disaster, down another 7.26%, and Old MutualGlencore, Shire, Antofagasta, Tesco, Burberry Group and Prudential all falling around 5% or more. Given such a dismal start, some investors may decide to give 2016 a miss altogether and make plans to emerge from their bunker this time next year.

That would, of course, be daft. Whenever the FTSE 100 falls towards 6,000, I sense it’s time to buy. In volatile times, buying on the dips makes far more sense than buying on the upswings. It isn’t easy to do. Too many investors only pluck up the courage to buy AFTER share prices have risen and the future looks brighter. There’s comfort in following the herd, but little profit.

What to buy

Buyers have to choose their stocks carefully, however. Personally, I would steer clear of the commodity sector as I feel the bad news isn’t over yet. The oil majors could also be in for a tough few months as the price crash threatens dividends at behemoths BP and Royal Dutch Shell. The big supermarkets such as J Sainsbury and Tesco may also feel more pain as Aldi and Lidl gobble up further share.

There are better prospects elsewhere. My tip for this year is Lloyds Banking Group, which trades at just 8.8 times earnings despite a forecast yield of 5.1% by December. Barclays and HSBC Holdings may also be due a recovery. National Grid has decent prospects and yields a solid 4.8%. Unilever keeps on delivering the goods year-after-year. BT Group, Hargreaves Lansdown, ITV and Sky are several exciting growth prospects that spring to mind.

Investor pessimism is a blunt instrument that strikes down good companies along with the bad. That makes now a great opportunity, if you pick the right stocks.

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Harvey Jones holds shares in Prudential. He has no position in any of the other shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.