The past 10 months of global shocks and stresses have rocked financial markets around the world. It is an understatement to say that these are challenging times for clients and advisers as we try to discern the magnitude of change and the outlook for the future.
Those of you that have invested over a long period of time will know that we have been through this before and although the trigger events may be different, markets have a pattern of reaction. The first step is to pull back to a level that reflects a ‘worst case’, very bad outcome and then evaluate what actually happens and what is expected going forward.
Throughout this turmoil we have been in regular communication with the managers that we have recommended to you, who invest your money. Markets fall quickly and often not in a logical manner and although your portfolios may appear to be unchanged, the active managers are making strategic changes on an ongoing basis. They sell out of stocks that have not fallen as much, and into stocks that have fallen “too much” as they aim to identify areas of value throughout these price swings. The benefit of these changes will be reflected as markets normalise and become less stress-driven.
For the first time in many years, there are opportunities to achieve good interest rate returns and there are interesting opportunities for holders of cash.
- The stock markets are made up of good quality companies, with solid businesses and balance sheets, that will be around for many years. Share prices have fallen because the market in general has fallen but the underlying companies remain strong, for long term investors this is a potential opportunity.
- Annuity rates have increased to a level that offers better value for securing lifetime income than we have seen for quite some time.
Where are the markets now? Market index levels are currently reflecting the following:
- Significant global slow down.
- Further interest rate rises in the US and UK continuing in to 2023.
- Unchecked inflation.
- The Ukraine/Russia conflict struggling on through 2023.
- An ongoing energy crisis particularly in Europe and the UK.
In our view there are signs that the outlook in these areas is becoming clearer and perhaps less negative:
- There is a growing consensus that further interest rate increases in the US and the UK will end in 2022 and be no higher than currently discussed.
- Early indications that inflation has peaked – supported by falling commodity prices.
- Europe and the UK are well positioned to get through the winter with minimal energy shortages, helped by a mild autumn and gas storage inventories being ahead of target.
- US companies are buying their own stock at historically high rates which reflects their view of the value at current prices.
- Institutional investors are holding substantial cash balances, the highest levels seen for many years. Although they are getting reasonable rates on cash, they will want to get this money invested once they are confident in valuations.
The markets are always looking forward and volatility will remain high until there is factual evidence of the impact of inflation, interest rates and global growth on the ability of companies to continue to be profitable.
For our clients who are recent first-time investors, the investment experience this year is undoubtedly painful and stressful. However, in every market downturn there will be people who invested at the top of the cycle. Those that held their nerve and did not sell out or change their strategy reaped the rewards long term.
The table below shows the drops that people experienced from the top of the market in the three previous market downturns and the subsequent rallies from the bottom of the cycle.
| POINT OF INVESTMENT | IF THEY SOLD AFTER THE DROP | THE RECOVERY THAT WOULD HAVE BEEN MISSED |
| Early 2000 | -43% | +135% over the next 4yrs 9 months |
| Early 2007 | -41% | +223% over the next 10 yrs 10 months |
| Early 2020 | -25% | +36% 1 yr 8 months |
Source: Timelineapp Tech Limited using data from Global Financial Data.
Since December 2021, the MSCI global index has dropped 18% but it is still 12.15% higher than the pre pandemic high in February 2020.
As an investor it is often difficult to ride through extreme volatility; there is a desire to take action to try to mitigate loss of portfolio value. However, experience has shown that, usually, doing nothing until there is a clearer view is the best course of action.
As we say repeatedly, investing is for the long term not short term. If the investment is genuinely long term, you are only experiencing book losses and they only become real if you sell at this point. It is likely that the global economies and markets will stabilise, the only question is how long this process will take.
We encourage all our clients to reach out to their advisers if they are concerned or would like to explore new opportunities that may be suitable for them.
Pamela Murphy (DipPFS)
Partner
Photo credit: Pixabay/Gerd Altmann