According to reports, investors have withdrawn 3% of their equity investments so far this year, which is twice the amount withdrawn at the height of the 2008 financial crisis. When negative sentiment is abundant and investment risks are at large, the temptation is to cut and run for the shelter of ‘safer’ assets. But by the time these risks hit the headlines, markets have already adjusted, and to make significant investment changes only serves to lock in losses rather than avoid them.
Uncertainty can lead to opportunity
The key is to see significant risks coming before markets do. We positioned portfolios defensively some months ago, which meant we weathered most of the volatility experienced over the summer. We’ve also positioned portfolios defensively for rising inflation – something markets have yet to ‘price in’.
But that was then, and this is now. How do we position portfolios for the future? Rather than shy away from equities, our strategy is to take advantage of any opportunities that arise. In the event of a recession (more on that later), we would expect to increase our equity exposure and take advantage of attractive assets trading below their real value. It’s having the ability to cherry-pick the most attractive assets at the right time that gives the potential for long-term returns.
Patience is a virtue
For now, we believe we are well positioned for the prevailing conditions, which means there is no need to make any strategic changes to our asset allocations. While we might make the odd tactical change if a company suddenly looks attractive, our focus is on solid, established companies – those with strong balance sheets, and where the profit outlook is less dependent on the economic cycle. At the same time, we remain invested in fixed income, as these assets can appreciate even in times of market stress and counteract some of the volatility in equity markets.
It’s an unnerving time for investors, but the key is to be patient. This is all part of a normal business cycle – nothing like the crisis we found ourselves in 10 years ago.
“The persistence of low interest rates is good news for business, and for government spending, and might mean the difference between a full-blown recession and a mere slowdown in economic growth. But even if we are headed for a global recession, our portfolios are well positioned to take advantage of any opportunities that arise.” - Phillip Smeaton, Chief Investment Officer
Investment view: Is recession ever a good thing?
With many of us still scarred by the economic downturns that followed the financial crisis and the tech bubble, perhaps it’s not surprising that investors are feeling particularly nervous at the mere mention of the word ‘recession’. But, as we discussed last month, we need to be careful not to allow our fears to drive damaging investment behaviours.
Because we’re neither in the middle of a banking crisis nor a valuation bubble, there are lower associated equity losses should there be a recession. The chart below shows that the median recession has led to a 20% equity loss, and this would be even less for diversified portfolios.
Such losses are more easily recovered as the economy returns to growth, and investors can take advantage of opportunities that arise as a result of the downturn. It’s the old adage – sometimes things have to get a little bit worse before they can get better.
A word on Brexit
With the October deadline looming, we thought we would update you on our stance on Brexit. As we’ve said before, our portfolios are globally diversified, and any exposure we have in the UK is largely with companies that trade internationally and earn returns elsewhere. Like everyone, we are hoping from some clarity very soon. Regardless of whether there is a deal or no deal, we believe businesses will evolve according to the prevailing economic rules. Let’s hope that by next month we will know what those rules are, although we’re not going to hold our breath.