You may have noticed recent press headlines about market movements and wondered what this may mean for your portfolio. If you missed the headlines, we hope this article is still interesting for you.
Most clients will know that we have consistently argued for many years that our clients should focus on long term fundamentals rather than on short term market gyrations. We haven’t changed this view.
What’s driving the uncertainty?
The recent market fluctuations (or ‘volatility’) have been caused by the following factors:
1. Uncertainty in China
New economic data out of China released last week suggested that Chinese factory activity had fallen to levels last seen in 2009.
This followed a surprise move by the Chinese Government to devalue their currency by 2% the week prior, the biggest such devaluation in 20 years. The Chinese Government did this to make its exports more competitive and to reduce borrowing costs.
It will be interesting to watch the political fallout from this currency devaluation in coming months as in the past the US has accused China of manipulating its currency lower.
The reaction in the US markets to China (US market down ~3% last Friday) has in turn spooked Chinese investors with the benchmark Shanghai Composite index down ~8.5% in early trade on what is being referred to as “Black Monday”. This daily fall (the third worst in 15 years) effectively reduced the gains in the Chinese share market for the year to zero.
In response, Chinese authorities have allowed Chinese pension funds managed by local governments to invest in the stock market for the first time. This move could potentially allow access to hundreds of billions of yuan of “new money” into China’s struggling share market.
2. Oils ain’t oils
The fall in China has led to a drop in world oil prices (down $4 a barrel).
The drop in oil prices should actually be a positive for world growth as oil is a major input price and consumers are set to benefit. However, it could also likely lead to jobs being lost in the energy industry globally. At USD $40.80 a barrel, oil is significantly down from its 2008 peak of ~$150 per barrel. If the Iran nuclear deal is passed by the US Congress as seems likely, this could bring more supply on line from currently embargoed Iran and create more downward pressure on oil prices.
2. US reacting to China
Last Friday the US market fell 3%, the fourth consecutive day of falls. The market had its biggest trade volume of the year and posted the biggest one day fall in four years. While the negative news out of China weighed on sentiment, there was a lack of other positive economic news to motivate buyers.
The lower oil prices should actually benefit the US economy in the medium to long term, but in the short term it highlights the perceived weakness in global market confidence.
We expect the negative reaction out of China in response to the negative response in the US to the negative news out of China to result in a further reaction in the US. Did you follow that? (Follow up: The US market did indeed fall as we predicted on Monday)
In essence, while market participants aren’t really sure what’s going on they assume the worst and markets move in rapid swings accordingly. As the market digests the information and makes a more informed decision as to what’s really going on, you can expect rapid swings in the opposite direction.
The one thing we can predict with certainty is that we are now going through a period of higher market volatility.
What should I do?
As markets swirl around this can be unsettling and it can be reassuring to know that we, your advisors, are constantly reviewing what is going on and reassessing what it may mean for you.
First and foremost, when we put your portfolio together our focus is on:
- Ensuring the defensive allocation of your portfolio buffers you against downswings as they arise
- Ensuring the growth allocation of your portfolio is exposed to best of breed product providers who have a proven track record of returns and principal protection.
- Ensuring the growth allocation of your portfolio is exposed to blue chip investments that match our high conviction investment ideas.
Through our extensive and thorough product provider due diligence and product research, we are incredibly proud and protective of the fact that we have not advised a client into a product that has either been frozen or has fallen over.
Accept that it’s hard not to panic
We defy anyone to make an informed investment decisions when newspaper headlines shift 180 degrees on a day to day basis.
Should we be buying, selling, panicking or doing nothing? Based solely on headlines involving ‘bloodbath’ and ‘billions wiped’ we wouldn’t have a clue what to do. Should we sell now markets are down and then buy back when they recover? But wouldn’t this just be a perfect example of selling low and buying high?
In fact, if we advised based on media headlines we’d have our clients buying and selling like mad as we chase our tails and investment returns.
It’s probably no surprise that we don’t recommend this approach. We don’t recommend you totally ignore short term fluctuations but we do caution clients to be mindful their investments are part of a long term strategy and, despite the current fluctuations, we see this recent volatility as a correction.
We further expect that as the market reaches certain trigger points investors sitting on the sidelines in cash will use this as an opportunity to re-enter markets and make a short term profit.
Those with a good memory may recall that in recent months the biggest market concerns were Greece, Ukraine, ebola & Middle East. The market moved on from these at the time major concerns fairly quickly.
Is it a buying opportunity yet?
Given recent market falls, a number of clients have contacted us to ask two main questions:
1. Are the markets going to fall more and so should I now sell?
2. Should I be using this fall as a buying opportunity?
Clearly every investor’s appetite for risk is different and so too is how they respond to market movements.
If you are in the first camp leaning towards potentially selling we’d highlight the following points:
- You have in place a well constructed, diversified portfolio that is designed to support you through economic downturns. It consists of blue chip investments that have positive long term prospects. As long as you do not need to sell in the short term, fluctuations can be ridden out.
- We have never advised clients into investments that have either fallen over or been frozen. As long as you don’t need to sell quality assets in the short term, quality assets are always recognised as such by the market in the medium to long term.
- If you do sell investments now, you will be selling low. If you then buy back into those same assets when the market rebounds, you will be buying high. To us this is not an ideal strategy.
- Perhaps adopt the strategy of looking at your portfolio a little less often. Riding the daily or even daily waves of fear and excitement can be stressful. That’s what you pay us for – to worry about your money.
If you’re still fearful, please contact us immediately to have a chat. We’d far prefer you to methodically take some risk off the table than not sleep well at night.
For those who are thinking of buying more
We believe we have entered a period of higher volatility and so expect shares to swing more in value, both up and down.
There is a chance that markets could fall more but we do view the fact that we are relatively close to the ASX 5,000 mark as a positive. However, given the ongoing uncertainty, there is no guarantee that markets will rebound quickly in the short term to higher levels seen in recent months.
If you’re tempted to jump at the latest news headline, make sure you give us a call first.