Investments / Financial planning

Riding the markets – investment in the face of inflation

After something of a boon a few months ago, world markets have experienced a rather lacklustre start to the year. Charlie Buxton, our Portfolio Manager, reflects on the mood of financial markets and what this means for investors.

World markets enjoyed a buoyant 2021, but this January left something of a bitter taste with $6 trillion wiped off the MSCI World benchmark in just a few short weeks. Bonds, usually a stalwart in these conditions, even struggled too. From a stock market perspective this sadly translated to the worst start to a year since 2008. Analysts have been quick to comment, and terms such as rollercoaster have become a bit of a watchword as we move through these first months of the year. So why is this happening and where do markets go from here?

The reasons for the current situation are pretty clear. The stimulus which central banks provided to shield economies from the effects of the pandemic are now being wound in. Inflation is up and interest rates are being increased, perhaps even more aggressively than at first anticipated given the Bank of England’s decisions already this year, and the Federal Reserve’s recent announcement. Geo-political tensions such as Russia’s possible invasion of Ukraine and disrupted global supply chains are also playing their part. Against this backdrop, the investment strategy of ‘buy the dip’ seems to have run its course.

Looking for growth

For many investors the attraction of companies which are growing quickly remains a tempting prospect. Some of the stalwarts including Microsoft, Google and Apple initially bucked the trends, and helped hold up global indices. But this year has proved tougher, and news such as Meta’s loss of $200 billion in one day in early February shook markets. Some commentators have been prophesising a bigger crash, but the signs are there that investors remain relaxed, and view short-term volatility as a pretty natural reaction to last year’s run, and a tightening of central bank policy. It’s also worth considering that stock market corrections are normal and should be expected, especially in the wake of the past couple of years.

In fact a recent report by Goldman Sachs reported 21 non-recession market corrections since 1950. On average, in these situations stocks fell by 15% without the national economy contracting. And those buying up US stocks whenever they fell 10% from their peak, created average returns of 15% over the next year.

Time in the market

So for investors with a long-term timeframe, that old adage of time in the market really does apply. In fact, the reality of interest rate increases is likely to be less concerning than the possibility of them. Volatility is a normal by-product, and likely to be a temporary – markets just need the chance to correct. Looking back historically, bear markets, which are identified by a 20% fall from peak, are generally seen as part of economic recessions; an unlikely situation now with interest rates simply nudging up a couple of points.

Finding resilience

Some global stocks have also shown some resilience. Outside of more expensive stocks, so-called “value” shares, and certain markets which received less attention from investors last year, have been more robust and enjoyed strong starts to 2022.

When markets are turbulent, it can be tempting to consider a more short-term plan and make quick decisions. However, it’s important to block out the noise, trust your decision making, and speak to your investment adviser about your own goals and attitude to risk.

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