Fiducia Wealth Management

Market volatility – should investors ignore the noise?

As investors, it can be all too tempting to try to predict the future or react to events as they happen. We understand that our clients want reassurance yet remain alive to investment opportunities as markets continue to fluctuate.

Yet the dangers inherent in a reactive approach are clear. On the one hand, your emotions can prevent you achieving your investment goals. On the other, events are unpredictable at the best of times, and perhaps especially just now. Moreover, it’s not always easy to sort the facts from the fake news. Fear is not a sound foundation for decision-making.

The best investors do not seek to time the market by forecasting (or reacting to) short-term events. Rather, they know that there will always be periods of uncertainty and so they adopt a plan for the long term.

Markets are inherently forward-looking

As chartered wealth managers, we have been contacted by clients seeking guidance on how to deal with the financial market crisis triggered by the coronavirus pandemic. Guidance is always based on expertise and never has expert knowledge been more important, both in terms of the pandemic itself and in terms of its economic fallout.

As we have recently stated in our Market Update and in our Investment Officer’s podcast interview, the near-term outlook is extremely challenging. But we believe that – consistent with historical experience – there will be a bounce back in activity once social distancing measures are relaxed, and monetary and fiscal stimulus combine with a resumption in discretionary spending. Businesses that can weather the crisis should be prepared for a strong end to 2020 and start to 2021.

Global recovery delayed, not derailed: remember recoveries can come quick

Start Date End Date Days %Decline Recession? The next 250- days
19/02/2020 15/03/2020 25 -19.9% Yes ?
20/09/2018 24/12/2018 95 -19.8% No 37.0%
20/05/2015 11/02/2016 267 -15.2% No 25.5%
02/05/2011 04/10/2011 155 -21.60% No 28.50%
09/10/2007 09/03/2009 517 -56.8% Yes 68.3%
24/03/2000 09/10/2002 929 -49.1% Yes 33.8%
20/07/1998 08/10/1998 80 -22.50% No 38.10%
16/04/1990 11/10/1990 178 -19.9% Yes 28.8%
25/08/1987 20/10/1987 56 -35.90% No 16.30%
30/11/1981 12/08/1982 255 -18.9% Yes 55.4%
13/02/1980 27/03/1980 43 -17.1% Yes 39.6%
21/09/1976 06/03/1978 531 -19.40% No 11.50%
15/07/1975 16/09/1975 63 -14.1% Yes 27.5%
07/11/1974 06/12/1974 29 -13.6% Yes 34.7%
12/10/1973 03/10/1974 356 -44.1% Yes 34.7%
Average     -25.86%   34.26%

 Source: Seven Investment Management

As the above table indicates, in nearly all cases once recovery begins, markets increase by more than the original decline. This therefore illustrates the importance of remaining invested throughout challenging times since, once recovery happens, it tends to occur at a pace.

Our baseline forecast assumes that the COVID-19 outbreak is brought under control and that activity in China can recover to its pre-crisis level by the end of the second quarter. Global activity should then recover relatively quickly as production levels return to normal. On this basis the recovery is delayed not derailed, as the factors which supported the recovery remain in place.

Central banks around the world have lowered interest rates in the past year to spur economic growth and the full benefit of this has still to fully flow through to activity. Similarly, the reduction in trade tension as a result of the phase one trade deal between the US and China should lift growth as uncertainty ebbs.

Over the past 10 years, the compound return on the FTSE 100 was 8.8% per annum, which is around average once inflation is taken into consideration. As a total return that was 121%.

During this time frame, the UK economy was just starting to recover from the 2008 financial crisis. In March 2009, the FTSE 100 reached a six-year low, trading below the 3700 mark for the first time since 2003. But the index experienced a spectacular recovery throughout the remainder of the year, as the top 100 firms collectively increased in value by more than 22%.

Opportunities

The changes we are making to our investment management, outlined on the 23rd March, will also create an additional degree of liquidity, which we want to have available to drip feed into the market as soon as we see signs of the virus being controlled and/or managed. At that time there will be significant opportunities which we want to be able to seize, while being very aware of the changes that will come about in terms of our lifestyles. Technology should receive a very substantial boost as collectively we find a new normal. As you would expect, research is ongoing to identify the funds and managers best placed to exploit those new opportunities.

Below is an example of how selling to cash at the wrong time can reduce the long term returns of an investment portfolio. It also illustrates how markets have recovered from previous economic fallouts. It is all too easy to want to sell when scared, but history suggests that an emotional response is not a disciplined response and is therefore not advised.

Diag. 1

The impact of emotion: it’s easy to sell when you’re scared

Graph illustaring how stocks recoverSOURCE: FE Fundinfo2020

We hope that we have provided some helpful explanations and given an insight into the current changes to the portfolios as well as our future thinking and areas of research.

You can also rest assured that our team will soon be implementing a new client management system whereby remote meetings and video communications will be seamlessly worked into our continuity plan with all advisers delivering the same, personal service that you trust.