Global Markets to 14 January 2019
- Global equity markets start the year in a positive mood as investor confidence returns.
- The United States and China hold important trade talks, and while we await details of them, early signs are positive.
- Recent core inflation data should give the US Federal Reserve Bank more time to take stock and slow down its proposed monetary tightening programme.
- In the UK, sterling is slightly up ahead of the crucial Brexit vote.
- Regarding commodities, the price of crude oil has another positive week, with Brent crude climbing back above US$60 a barrel.
- After last year’s disappointments on equity markets, and capitulation in the final quarter, it’s always worth remembering that investors need to think in terms of decades, rather than taking a view over one year or – worse – a quarter.
Global Market Summary
While the financial markets behaved very disappointingly last year, with financial crisis points occurring more often, the investment landscape for global investors has become far more problematic. But in our opinion, this opens up excellent investment opportunities for those who have longer-term investment objectives.
Understandably, however, investors tend to get anxious and panic more, before finally capitulating on the markets. Anxiety levels peaked again in December of last year: investors’ tolerance levels were tested by an abundance of softer economic data, political uncertainty and – perhaps most significantly – negative media noise.
As a general rule, stock markets experience positive upward trends followed by downturns – known in the industry as bull and bear markets. Unfortunately, the trends tend not to have the same time lines. Bear markets are abrupt and quite devastating, while bull markets last longer and are significantly more rewarding. It is therefore a more worthwhile long-term policy to spend “time in the market, rather than trying to time the market”, and experience shows that the best returns tend to be obtained by adopting this policy.
Admittedly, in the midst of a bear market or a period of correction, new entrants on the markets are unable to profit from yesterday’s growth and can therefore become disillusioned or worried about future returns. This is perfectly natural, and as financial planners with a discretionary offering, we investigate such concerns on an ongoing basis.
However, history has taught us that meaningful corrections on the markets are a time to evaluate and then take advantage of the situation; and most importantly, a time to hold one’s nerve. Any well-thought-out strategy and portfolio construction should therefore benefit from the recovery that tends to follow an aggressive pull-back in asset prices. Indeed, investors should always bear in mind that long-term strategies can be jeopardised by short-term panic.
Generally, good investment opportunities come about when excellent companies experience unusual circumstances, causing stock prices to be misappraised. This tends to happen rarely, but when it does, the rewards can be very high.
In this respect, Warren Buffett’s advice is most apt: “Be fearful when others are greedy and greedy when others are fearful”. Furthermore, short-termism can lead to dreadful mistakes. Indeed, when Buffett talks about investment time periods, he always says that “forever” is his favourite holding period.
Stock markets will always be vulnerable to daily noise and volatility. But although you should accept both, you should not make meaningless changes to your portfolios based on either. Base them instead on your investment objectives, fundamentals and quality positioning. And then stay the course.
History tells us that this is the best way to secure excellent returns. Time in the markets is your portfolio’s friend; daily noise is the enemy. The real key to making money on the markets is to avoid being scared out of them. Paying into ISAs, pensions and general investment accounts is the right long-term decision, regardless of today’s or tomorrow’s market conditions.
The investment backdrop is still admittedly clouded with uncertainty. But attractive valuations are back, and both professional institutions and private investors have begun putting their money back to work in regions and sectors that have recently been out of favour. The emerging markets – particularly Latin America –, technology and the small caps appear to be leading the field so far in 2019, while the price of crude oil has also recovered by over 10% since 1 January.
Of course, the year has only just begun and we are long-term investors. But with a pause in the Federal of Bank’s monetary tightening programme, a possible breakthrough in the US-China trade talks and a possible soft landing for both the US economy and the wider world, things might not be quite so bad as the markets have predicted.
Once again, stock markets tend not to be rational; and many of them are currently looking oversold, providing some very sound investment opportunities. Elephants, however, do not gallop: investors need to be patient.
Also worth bearing in mind is the ever-changing nature of the investment landscape, with disruptive forces being felt right across it. The corporate landscape continues to be transformed by a revolutionary combination of technological innovation and – possibly more importantly – consumer preferences. This in itself has ramifications for investments: over the next decade or more, there will be corporate casualties.
From an investment perspective, it is, therefore, crucial to own quality businesses that have creative boards, strong balance sheets, healthy cash flow and rising dividends. Most importantly, these should be businesses that look towards the future… not businesses that are stuck in the past. With this in mind, we are inclined to populate our clients’ portfolios with those funds and fund managers who seek out and identify many of those particular businesses that will be tomorrow’s winners in whatever global sector they may represent.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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