By Dan Boardman-Weston, CEO and Chief Investment Officer at BRI Wealth Management
Everything seems pretty bad at the moment. We’ve got a war on the continent, rampant global inflation, a government in turmoil, the second largest economy in the world grappling with COVID, interest rates rising rapidly, significantly slowing growth, etc.
This is not an especially helpful confluence of factors for global stock markets, with the worst year for a ‘balanced’ portfolio (60% equities, 40% bonds) since 1937.
Things are tough in the financial world and tough in the ‘real’ world. A whole host of factors have led to markets falling quite sharply this year, volatility of this magnitude is quite rare but has happened quite a few times over the last few decades. The long-term outlook still looks bright though and focussing on the long term is the best investment strategy.
What might happen next?
Markets have already responded aggressively to many of the issues that have occurred on the investment landscape over the past six months and a large amount of the negative news is already accounted for in asset prices.
It seems as though inflation will remain high throughout 2022, central banks will continue to raise interest rates quickly and growth will slow. Whilst much of this is understood by markets, it still feels like markets could be volatile and that we could see further short-term downside. We think as we head into 2023, we are likely to see slowing inflation – as interest rate rises subdue demand and supply starts to sort itself out – and western economies in recession.
This will likely lead to cuts in global interest rates as we progress through 2023 and this is likely to be positive for most asset classes. Before we get to the point of central banks cutting rates and inflation slowing down, we think we’ll have seen the bottom in the market and could then see some very strong performance. Markets have a tendency to over extrapolate the short term and conclude that it’s going to be this way forever. Things won’t be this way forever. Inflation will fall, growth will pick up and investor sentiment will improve. Things will get better.
What will we do?
There will come a point where the time is right to buy and for us to tilt portfolios to be more on the offensive than the defensive. It is uncertain when this will be, and it is notoriously difficult to call the bottom or top of markets. Bearing this in mind, we have a phased approach for tilting portfolios if markets continue to weaken.
In essence, if markets continue to fall then we will make changes that improve the long-term performance outlook of our clients’ portfolios. We know what we want to buy, what we want to sell and when we’d like to start doing it. We won’t detail all of the things that we’re interested in in this article, but it’s fair to say we have quite a lengthy shopping list, and this particular shop (the stock market) has got a great sale on.
The world is quite an uncertain place at the moment, but we think it’s easily forgotten that the world is always a relatively uncertain place. The circumstances that have led us to this uncertainty may be novel, but uncertainty itself is not. Notable periods of heightened uncertainty are listed below:
• Bursting of the Japanese asset price bubble of the 1980s
• Black Monday in 1987 (markets fell over 22% in one day)
• Black Wednesday in 1992 when the government had to withdraw from the exchange rate mechanism (ERM)
• 1997 Asian Financial Crisis
• 1998 Russian Crisis and the collapse of Long-Term Capital Management
• The bursting of the dot com bubble between 2000-2003
• The terrorist attacks on September 11th, 2001
• The Global Financial Crisis between 2007-2009
• The eurozone crisis between 2011-2012
• The Oil crisis of 2015 when Oil fell from $120 to $28 a barrel
• The Scottish referendum
• The Brexit referendum
• The escalating trade war in 2018
• COVID Crisis
All of these events have led to a 20% or greater fall in markets. Yet markets have recovered each time. The graph below shows the performance of the world stock market over the past 35 years.
The market has endured the slings and arrows of outrageous fortune and has always come out on top. This time is no different. We may see more uncertainty this year, we may see further falls but markets will recover. Focussing on the long term can be quite difficult to do during short term turmoil and when you see losses on your portfolio, but it’s the most successful investment strategy.
As many know, markets, businesses and economies go through cycles and the peaks and troughs are an integral part of cycles. Investors emotions tend to correspond with market cycles and emotions change as we move through different parts of the cycle.
It’s important to recognise the role emotion can play in investing, but recognising it is the first step in taking advantage of it. Fear, desperation, panic, capitulation, despondency and depression are all emotions that we may feel about the markets over the coming period. However, calm and rational thinking will prevail, and it gives the patient and logical investor opportunities to generate attractive long-term returns.
We’re confident that investing, and also our approach to investing, is the correct way to give our clients the highest possible chance of meeting their long-term goals, whether that’s saving for retirement, passing assets to children and grandchildren or any other reason. We understand that these are challenging times and we, at BRI Wealth Management, are here to help guide our clients through them.