Global stock markets have been on shaky ground since the start of 2022, but the current weakness could represent a buying opportunity, with analysts advising that investors focus on value stocks.
According to a poll by financial service comparison platform Finder, 48% of UK investors are planning on buying the current dip in the market. A further 4% of people who have never invested in the stock market before plan to do so for the first time now. Four in five people in the UK currently don’t invest — and have no plans to do so — and 52% of those that do don’t plan on dipping into the stock market to pick up undervalued shares.
This means that around one in 10 (12%) of the UK population would potentially buy the dip if global stock markets fall by 20%.
Analysts are pointing towards value stocks as a possible buying opportunity in this current market drop, with UK firms such as Whitbread [WTB.L], Halfords [HFD.L] and Kier Group [KIE.L] potential beneficiaries of the dip.
Nearing bear market territory
Let’s take the recent performance of the S&P 500, for example. The index gained 27% in 2021, with a few selloffs in between, but it’s down almost 10% since the start of this year. It fell more than 5% in January, followed by 3.14% in February.
While the S&P 500 is not quite in bear market territory yet, a continuation of the recent selloff is not outside the realm of possibility given the cocktail of pressures markets find themselves under: Russia’s invasion of Ukraine, rising Covid-19 cases around the world and the Fed tightening monetary policy.
According to data compiled by Finder, the S&P 500 has fallen 11% in the past 49 days. How does this compare with other major pullbacks? The value of the index plummeted 34% in just 32 days at the start of the Covid-19 pandemic, before slowly recovering again. But in the first 49 days of the financial crisis of 2007 to 2009, the index fell 7%. And in the same period of the dotcom bubble, the index fell 5.4%.
On the face of it, the data implies that the current selloff the S&P 500 faces is worse than previous crises. The Nasdaq has already skidded into bear market territory, with rising oil prices pushing up stagflation worries. The S&P 500 could follow the same fate.
After the S&P 500’s best day since June 2020 on 9 March, chief economist at Oxford Economics Kathy Bostjancic told CNBC: “The equity market continues to take its cues from changes in commodity prices… Trading will continue to be volatile and rally when prices retreat, but overall the prospect of oil and non-energy prices remaining very high casts a cloud [over] the outlook for economic activity and the equity market.”
“Trading will continue to be volatile and rally when prices retreat, but overall the prospect of oil and non-energy prices remaining very high casts a cloud [over] the outlook for economic activity and the equity market.” - Oxford Economics chief economist Kathy Bostjancic
Analysts say buy value stocks
The S&P 500 closed on 16 March at 4,357.86 points after rallying 2.5% as the Fed announced its first rate hike, which is just above the support level of 4,300.
The jury is still out whether more indices will enter bear market territory. According to its latest monthly Global Fund Manager Survey, Bank of America reported that 60% of respondents are anticipating global equity markets to experience a bear market. But, the report noted, a bull market shouldn’t be ruled out either.
While investors can’t always time the dip perfectly, they can improve their chances of success in the market by focusing on value stocks. Speaking to Bloomberg’s What Goes Up podcast in January, Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management, advised against buying growth stocks during the current dip.
Slimmon said: “I’m not saying throw away all your growth stocks to buy all value because I believe in technology long term. But I do think that we’ve come out of a decade of slow growth and we’re moving into a faster-growth environment. And I think you want to own a few more value stocks.”
So, what are a few of the UK value stocks investors should think about adding to their portfolio?
Hospitality business Whitbread could be a key beneficiary of any stock market rotation. The share price recorded its 52-week low on 8 March 2022 and was down 6.6% since the start of the year at the close on Thursday 17 March.
Another stock that can be considered cheap right now is Halfords. Like Whitbread, the cycling and motoring retailer recorded a 52-week low on 7 March 2022. Though it’s trading 16.9% higher as of 17 March, it’s down 23.1% since the start of the year.
Infrastructure services firm Kier Group [KIE.L] is another to put on your list. The stock might be up 27.6% from its 52-week low set on 26 April 2021, but it’s down 19.7% since the start of the year.