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Point of View

Fasten your seatbelts, and (try to) enjoy the ride

By Matthew Brittain, Investment Analyst

 

The psychology of equity markets is fascinating at the best of times, but recent market falls seemed to have bewildered even President Trump when he tweeted “In the ‘old days’ when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!”
 
For most people working in equities, these falls didn’t come as a huge surprise. The market had already risen to reflect the ‘great’ economic news that Trump is referring to and, while we hate to see our investments going down, we see this small shock as a healthy event as it reasserts fundamentals (as opposed to a story), and prevents an imbalance from becoming a bubble. Inevitably, something had to give, and rising bond yields were the catalyst, giving rise to a 10% correction (as at 08/02/18) in the Dow Jones, with other global markets moving in lock step.

The end of an era

For 10 years central banks have been supressing market volatility, supporting asset prices, and keeping bond yields low through their quantitative easing (QE) programs. But these conditions could not last forever, and the US is leading the charge in weaning the global economy off the artificial stimulus.
 
It was inevitable that this change in monetary policy would filter through to bond yields, which are now on the rise. The bond market is forward-thinking and reflects future expectations, and so the yield curve is already reflecting what is likely to happen in 12 to 18 months’ time. The recent sell-off in equities stems from rising bond yields and interest rates, which are starting to make equities less attractive as investors can seek returns elsewhere, while taking less risk. Should this trend continue it will be a significant change, as equities have been one of very few places for investors to find decent returns in recent years, while rising prices means they have been taking more and more risk in the process. Those days now appear to be numbered.

What does this mean for Sanlam investors?

The great news for our investors is that we’ve been very focussed on this risk, and our portfolios were well prepared. We’ve been under-weight in equities, and have been holding very little in the way of Government Bonds for some time now. As a result, our clients have experienced smaller losses than others in the broader market. We’re well positioned to take advantage of the volatility that lies ahead, especially if the sell-off persists and some real opportunities are made available.
 
We think this is only the beginning of a sustained period of market uncertainty. Indeed, the recent correction has only wiped gains made in January this year, and we predict there’s more to come. But volatility brings opportunity, and we’re in a good position to maximise that opportunity as it arises, safe in the knowledge that the basic global economic fundamentals are good.
 
This news, while making great headlines, is not all bad. If you’re concerned, my advice is to talk to your portfolio manager. Don’t be scare-mongered by the press, and let’s hope that President Trump’s promise of strong growth continues to gather momentum.

Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.