Market Update
Markets make uncomfortable news at the moment; certainty is low, volatility is high. Our key message to clients is to see past the short-term fear which has driven the sell-off, and focus on the medium-term growth prospects which continue to support staying invested.
What’s been driving stock market moves?
Several factors are at play:
1. From mid-February, we’ve seen markets start to doubt what many, including us, thought would be an overall benign environment for growth under a business-friendly Trump presidency, albeit with a need to be actively diversified.
2. The introduction of high tariffs on US imports last week prompted a rapid sell-off in stock markets around the world.
3. The lack of certainty around the impact on the global economy means investors are struggling to take a clear view on companies’ prospects. Many are sitting this out, some are actively selling, and few are willing to step in and make a judgement call.
4. As investors have sold riskier equities, other assets such as gold and bonds have risen in value.
Are tariffs here to stay?
Perhaps not, but they are part of a plan to achieve some of the Trump team’s stated economic agenda: to lower oil prices, lower the cost of US debt, and reduce the value of the dollar versus other currencies.
This has come at the cost of a significantly lower stock market, with potential recession on the horizon.
What happens next?
The direction of the global economy remains unclear. The level of uncertainty will impact company decisions, for example over investment in new facilities or hiring new staff. Uncertain prospects and higher prices will tighten consumer spending. Overall, whether we see recession or not, global growth will be reduced in the short term.
If the tariffs announced come into place in the US, we expect further retaliation from trading partners such as the EU - in particular against US services and technology companies.
Some level of sector-specific measures have yet to be announced – for example in the pharmaceutical sector.
The prospect of further interest rates cuts is also in jeopardy. Tariffs and trade wars are likely to mean higher inflation, meaning higher interest rates are needed. But if we see recession and increased unemployment, then pressure for rate cuts will to stimulate the economy will grow. Positively, there is meaningful scope for central banks to cut rates from current levels if needed.
How should investors react?
Investors have three broad options: (a) sell out to less volatile assets or cash, (b) increase holdings, or (c) stick to existing positions.
Unless there is a change to your circumstances, such as a shorter timescale, or a materially lower appetite for risk, we recommend that you do not adjust your holdings. Our reasons are explained below.
Selling your investments now means that you will lock in the losses over the recent days and weeks, and risk missing out on the recovery when it comes. There is substantial evidence that retail investors earn worse returns because they sell after market dips such as the one we are in, and then miss out on strong-performing days as confidence returns. For example, during the initial Covid crisis, the S&P 500 fell 33% in 23 trading days before recovering 31% over the next 23 trading days.
If you are comfortable riding out further ups and downs then the Warren Buffett dictum of ‘be greedy when others are fearful, and fearful when others are greedy’ could apply. However, calling the bottom of a market dip is notoriously difficult, and investing more now is likely to be a bumpy ride in the short term, so needs to be done with care (and in small slices).
As an ARF investor, your money is in an investment fund (or several) which is highly diversified, and holds a wide range of assets in line with your risk-reward appetite and investment timescale.
Your funds have bought a broad range of investments in professionally-run companies and other assets which are managing their business for profit and cash generation over the medium and long term. Moreover, actively managed funds will be taking steps within the fund to mitigate the effects of these market moves. It is likely to be uncomfortable in the short term, but there is every reason to believe these funds will recover as your fund managers do their work and confidence returns to the market.
And there remain plenty of opportunities for success: consumer staples companies doing (literally) the bread and butter of economic work; domestically-focused companies that can respond to fiscal stimulus such as in Germany; inflation-protected infrastructure assets; and the long-term trend of technological progress remain intact. In the short term, bonds have again proved their resilience as ports in a storm.
Conclusion
That’s why we are urging our clients to look to the medium term, be patient, and stick with the plan. While the level of market falls is uncomfortable, we are within an expected range for occasional short-term market setbacks in the context of medium-longer term growth.
Our team is and will be on hand to navigate through the current market – you can get in touch with your usual contact or email support@arf-pensions.com.