What’s the difference between a crash and a correction? Answer: 5 letters and 15%.

A correction is defined as a 10% fall in equity markets, and a crash is 25%. The FTSE 100 Index dropped below 5,000 yesterday before rallying today. It was over 5,800 in mid April and is therefore down almost 14%. We are therefore past a correction but at present this is not a crash.

Whilst there are a number of economic and political concerns which are spooking markets right now, on balance we believe this to be a buying opportunity and not a reason to panic.

We look at the fundamental valuations of different asset classes and make recommendations based on those. We try to remain dispassionate and unemotional.

Don’t get us wrong, it is not possible to predict the direction of the markets but we can make estimates as to whether they are over or under valued.

At present the average dividend yield of the FTSE Allshare Index is 3.5%. 10 year Gilt yields are now 3.47%. When equity yields are higher than the gilt yield this has historically been a good buying opportunity.

This would only be the case if dividends on equities were predicted to at least stay the same, and not to fall. The consensus expectation for dividend growth (according to Reuters) is 10% this year and next.

The Price/Earnings ratio of the Allshare is 11.1 at present, below its long term average of around 14. If markets did not move from here and earnings rose as predicted, that ratio would get lower meaning the Index was even cheaper.

The fundamentals therefore appear in place to support some decent equity returns, provided those earnings and dividend levels do not fall off a cliff.