Share investors have breathed a huge sigh of relief on Wednesday as the waves of frantic selling battering stock markets have settled down.
Whether this will prove just a pause in the recent bear charge, or a definitive end to the recent correction (the FTSE 100 has fallen 8% from mid-January’s record close around 7,778 points), will become apparent in the coming hours.
But In this article I am providing three reasons why stock pickers may want to pile back in today.
Profit-taking the culprit?
The causes of the sharp decline across stock markets have been pretty well documented over recent days, but to provide a quick recap: the mass selling was prompted by an expectation of extra Federal Reserve rate hikes in 2018 amid rising inflation in the US, combined with the influence of machine-based trading.
However, intense profit-booking was likely the primary driver behind the scale of the selling frenzy, given the absence of shockingly ‘bad’ news flow in recent days. Rampant investor appetite to lock-in gains can hardly be considered a surprise given the impressive ascent of major stock markets across the world. The FTSE 100, for example, had risen 15% during the 18 months to January’s peaks, hitting record high after record high in the process.
The global economy is strong
As economists have been quick to point out since the washout kicked off, the scale of recent selling is something of a mystery given that the global economy remains in pretty good shape.
Just today the National Institute of Economic and Social Research (NIESR) commented that economic growth is increasing at its quickest pace since 2011, while at the same time upgrading its forecasts for the immediate term.
It now says it believes that the world economy expanded 3.7% last year, up 20 basis points from its November estimate. And economic conditions are expected to remain rock-solid for some time yet, the body predicting growth of 3.9% in 2018 and 3.8% in 2019.
Given this stable backcloth, many are predicting that the worst of the storm is now over. The boffins at UBS, for example, commented today that: “Given the strength of data, we consider it more likely that the sell-off abates before long, and are therefore not minded to fundamentally reassess our positive view on equities. Positive earnings revisions ratify a strong economic underpinning.”
There were plenty of dirt-cheap FTSE 100 shares for share selectors to choose from before the sell-off, and now the investment case for many of these companies is even more compelling.
The housing market remains extremely strong but I feel that these are not reflected in the valuations of the country’s largest construction firms. Taylor Wimpey, Barratt Developments and The Berkeley Group sport forward P/E ratios of 8.9 times, 8.8 times and 7.6 times respectively, all of which fall below the widely-regarded bargain terrain of 10 times or below.
Elsewhere, insurance giant Prudential’s long-term earnings outlook remains robust thanks to its exceptional emerging market exposure, as does that of advertising ace WPP and box-builder DS Smith. Yet these firms changes hands on forward earnings multiples of just 12 times, 10 times and 14.2 times.
And despite the positive outlook for global healthcare spending and a strong development pipeline, pharma giant GlaxoSmithKline deals on a forward P/E ratio of just 11.8 times.
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Royston Wild owns shares in Taylor Wimpey and Barratt Developments. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.