Buy some shares now - if you dare

Emerging markets have plunged in recent weeks, due in part to central bankers in China, India, Brazil and elsewhere hiking interest rates to stop their economies overheating. Vincent Thian / AP Photo

You have to be pretty tough to invest in stock markets right now. Only the brave would be willing to throw their hard-earned money into the current maelstrom. Or maybe the foolish and crazy.

Yet in times of extreme stock-market volatility, fortunes can be won as well as lost. Get your timing right and you can pick up shares in good-quality companies at panic prices, and cash in when confidence finally returns. As the legendary investor Warren Buffett puts it: "Be fearful when others are greedy and greedy when others are fearful."

With shares plunging 20 per cent in recent weeks and some banks and miners down more than 50 per cent, now could be a great buying opportunity.

The danger is that markets could easily fall another 20 per cent, especially if politicians in the eurozone and US continue to fluff their lines (as seems likely). So are you tough enough to take a chance?

Shares are getting cheaper in absolute terms, but that doesn't necessarily make them good value, says Mike Small, a partner at the Dubai-based financial consultant, VSM Consultancy, who has been warning of a second financial crisis for the past two years.

"Analysts keep telling us that now is a great opportunity to buy shares on the cheap. Shares are certainly cheaper than they were, but are they good value? Not yet."

Those who claim shares are cheap base it on something called the price-earnings (P/E) ratio. This takes the current value of a share and divides it by the company's earnings per share to see if it is fairly valued. If a company stock is trading at, say, US$20 (Dh73.46) and it generates earnings of $2 per share, its P/E is 10.

A P/E of 15 is seen as more or less fair value. The US is currently trading at an average P/E of 13, the UK at 10.5, Germany at 9.7, China at nine and Russia at a mere seven. Does that make these markets cheap? Mr Small isn't convinced.

"Low P/E ratios mean nothing if the global economy slows and company earnings fall," he says. "Shares may look cheap today, but they also looked cheap in 2008, until the crash."

Right now, being brave isn't enough. You also have to be properly informed. "Do you have enough information to make sensible decisions over the risks and rewards of investing? Given the current uncertainty, you probably don't."

If you want to know where markets are heading, you have to know how we got here, Mr Small says. "The current troubles have been brewing for years. They're not just going to blow over in a month or two."

Today's problems started after the collapse of the dotcom bubble and the 9/11 terrorist attacks. Rather than watch their countries slip into recession, US and European central bankers slashed interest rates to record lows. Cheap money flooded into property and consumers went on a debt-fuelled spending binge.

The boom was built on false money, Mr Small says. "In 2008, we had an almighty awakening. Central bankers dug us out of that hole by slashing interest rates, printing money and launching expensive stimulus programmes, but they didn't solve the underlying problem, that we are still in the final stages of a super debt bubble. Indeed, they added to it by creating more 'false' money."

Now the reckoning is coming. "The West has spent its future. Demand is falling as people and governments try to pay down their debts. There will be no fast return to the growth we enjoyed before. We are on a long and grinding road with potholes everywhere. So you should be sceptical about anybody claiming stock markets are cheap."

Even in difficult times, new ideas and technologies can drive profits, but it won't be as simple as it was in the boom, when you could simply buy property and watch it soar in value, Mr Small says.

Just as markets tend to overshoot in the good times, they also overshoot on the way back down. At some point, there will be a great buying opportunity, just as there was in March 2009.

Mr Small doesn't think we are there yet. Others disagree. Scilla Huang Sun, a fund manager at Swiss & Global Asset Management, says current stock-market volatility reflects investor panic rather than market fundamentals. "If we can avoid a double-dip recession, now is a good time to start dipping your toes into the water."

Don't throw all your money in at once; protect yourself by drip-feeding cash into the market. "When people panic, anything can happen. Markets will remain volatile, depending on news flow, so it is better to invest in several steps."

You should also pick your shares carefully. Ms Huang Sun manages the JB Luxury Brands Fund, a Luxembourg-based offshore fund that has outperformed thanks to the East's demand for western brands, such as Swatch, Louis Vuitton, BMW and Burberry.

"While the US and Europe are in a doom-and-gloom phase, sentiment in Asia and other emerging markets, where most demand for luxury products is coming from, is still positive. Now could be an opportune time to invest in luxury, as valuations are finally starting to look cheap."

Emerging markets have also plunged in recent weeks. That's partly due to central bankers in China, India, Brazil and elsewhere hiking interest rates to stop their economies overheating, and partly due to contagion from the West.

This could be a great opportunity to buy because the East should rebound faster than the West, says Andreas Roemer, the head of emerging markets at DWS Investments. "We expect inflation to peak soon and GDP growth should continue to be robust. Following recent weak performance, Chinese equities are attractively valued, creating an appealing entry point for investors. Indeed, we believe the recent market sell-off is overdone and provides a good opportunity to buy high-quality companies with strong business models and superior earnings power."

There have been few periods in the past 20 years when equities were this lowly valued, says Dominic Rossi, the global chief investment officer at Fidelity International, the fund manager. "However, they are cheap for a reason and may stay cheap a while longer. I'm not expecting markets to go back to the highs we saw earlier this year soon and, frankly, I wouldn't be surprised if we see further lows being retested."

Rather than a buying opportunity, today could be a selling opportunity, suggests Mike McCudden, the head of derivatives at Interactive Investor, a stocks and shares website. "Markets are in recession mode. Traders are running from the banking sector amid serious fears about undercapitalisation in the eurozone. The bears are in control, with the general consensus being that any bounce represents a good selling opportunity. Overwhelming fear is still driving these markets and without decisive action in the eurozone and US, the rot is set to continue."

Despite the gloom, there are some opportunities, says Mark Dampier, the head of research at the UK-based IFAs Hargreaves Lansdown. "Personally, I would focus on oil stocks and gold miners. Unless you think oil is set to hit $60 a barrel, there is no reason for oil stocks to collapse as they have done. They look like a screaming buy. Gold mining stocks have gone down. Markets are pricing in a gold price of $1,000 an ounce. Gold might fall from its recent highs, but I can't see it falling that low."

Mr Dampier recommends two mutual funds that could help you play these sectors: a UK-based unit trust called the CF Junior Oils Trust, from Capita Financial Group, and BlackRock Global Funds World Mining, which is available offshore.

The West must adjust to GDP growth of about 1 per cent a year, rather than 3 per cent, Mr Dampier says. "This won't be a V-shaped recovery, more like an L-shaped recovery. But there is still plenty of corporate activity, and balance sheets remain strong. If you have cash, you could slowly feed it into the stock market. Take your time; there's no rush."

At some point, the great buying opportunity will come. We haven't reached that point yet, says Clem Chambers, the founder of Advfn.com, the stocks and shares website. "Investors are right to be scared at the moment. They have no idea what is happening, how much shares are worth, or what to do about it. Given all the uncertainty, markets are likely to fall further."

If shares fall another 15 per cent or 20 per cent, that could be the time to buy. "The best time to invest isn't when people are saying things are looking bad. Wait until they are saying this is the end of the world and we're all going to die. That's when the real bargains can be found," Mr Chambers says.

Don't expect to get your timing exactly spot on. It is almost impossible to call the bottom of the market. If you wait too long, you could miss it.

If you are feeling brave, take advantage of any future stock market falls to load up on good companies and investment funds at discounted prices, and hang onto them for at least five or 10 years, preferably longer. That way, you can make money from the current mayhem. But the recovery is likely to be slow, so you will need to be patient.