The market turmoil has triggered a wave of uncertainty across financial markets.
Like a lot of the city dealers and politicians I am currently on holiday. The events of the last week however require some urgent attention and I have spent some time sifting through a mass of market information to determine the best course of action for our clients. It would seem that there is a significant risk of losses on the world stock markets over the next few days. Whether this is a downward trend is far less clear.
The following extract / summary from an article by Tom Stevenson of Fidelity international (6th august 2011 - in perspective) would seem to be worthy of consideration.
Some conclusions from a turbulent week in the markets:
• When markets are volatile, all of them tend to be affected indiscriminately. We believe that Asian and emerging markets now look oversold versus developed markets thanks to their much stronger economies and lower debt levels.
• After such rapid and widespread market fall, this is probably not the time to sell and crystallise today’s low prices. Timing the market is notoriously difficult and investors can often bail out close to the bottom when they allow themselves to be swayed by a prevailing feeling of gloom.
• One consequence of this week’s volatility is that interest rates are likely to stay lower for longer than was predicted even recently. Cash returns, which will be eroded by inflation, will remain inadequate. Investors may be nervous about investing in markets for growth but they will still need to search for higher levels of income than cash markets can provide. Equities and corporate bonds can both provide this income.
• Indiscriminate selling creates opportunities. Despite the lacklustre economic outlook in the developed world, many companies continue to perform well, especially those with an exposure to the higher-growth markets in the emerging world. A research-driven stock-picking approach is well-placed to uncover the best investment opportunities in this kind market.
• As Anthony Bolton, portfolio manager of Fidelity China Special Situations, says: “history shows that normally extreme equity market volatility, as we are now experiencing, should be seen as a time of opportunity rather than a time to become more defensive.”
At moments like this the standard question of 'what would you do if your investments had lost 20%' comes to mind.The more switched on clients would normally respond with comments such as :
• What the future expectation of that investment is?
• How much further will it drop?
• What are the alternatives?
• How much of my portfolio is affected?
• Can I afford to lose more?
Generally, the standard answer for our clients that decide to invest in volatile investments is to hold the investments or to hold and buy more of he same. Generally I think we should all bear this in mind before taking any actions right now.
If we consider the issues that are raised above one may decide to look at the alternative actions:
What are the future prospects for our existing holdings: generally all world equity markets have been hit in the last week - including the emerging markets whose economies are doing well and are not exposed to high levels of debt.
Why?
The US politicians dragged their heels in a debt decision thats been known about for a number of months - this has caused loss of credibility for US markets and down grade of credit rating agency. Employment stats were more positive than expected however. There are serious concerns that a number of large investment funds will ditch US bonds due to the down grade and that us will now go back into recession. This will affect business and share prices around the world.
Eurozone instability continues with threat of Spain and Italian debt levels. Feasibility of bailing out both is being questioned and doubts about Greece seeing through the required austerity measures. Bailout can have impact on german thriving economy and the reported alternative of shrinking euro membership will have unknown impact on the world.
At centre of the debt situation is the banking sectors. Some banks are facing big losses whilst others are faced with down valued prices that can recover with time. The fund managers of the financial funds we support should be well placed to chose the best holdings that should recover valuations and avoid those banks with problems.
It seems likely that we are faced with more losses in the short term. After that remains great uncertainty in all equity areas. Big , good companies that trade in the world will continue trading - these are supported generally within our existing holdings whether UK. Euro or US based. Their earnings will be affected should we go into recession as some predict. Should things get worked out and recession avoided then prices could well recover.
In the recent recession period FTSE100 fell greatly (40% approx) as is well documented from peak to trough. Within 14 months valuations had recovered for most investors - providing a nice return for those who invested at the bottom and providing only marginal losses for those who had invested 3 years prior. The big losers were those that sold equities when they where down.
An alternative home for your investments right now are cash - but as we know with high inflation and low interest rates in real terms your money is guaranteed to lose real value.
Gold prices have been rising over past few weeks and have reached record levels. In times of trouble this is a safe haven - the risk of investing here right now is that if this the threat of recession recedes in the short term then you could see prices falling quite sharply.
If banks tighten lending again then corporate bonds could prove to be a Good place to be.
In general - most of our clients have portfolios that have exposure to equities but also include a proportion of none equities. No one should be in position of having to sell equities in depressed times unless a speculative approach had previously been established.
Most clients that are investing in equities do not require access to money in short term and should only sell if they feel tactically advantageous.
Clients that feel markets will drop significantly more may feel inclined to sell equities with view to buying again at cheaper prices.
Clients that do not want to face further losses should consider selling existing equities or a percentage of the portfolio. You risk selling at loss and missing out on recovering prices. Would you sell your home right now by choice?
Long term investors who do not wish to speculate on short term Market movements are advised to maintain portfolios. Be prepared for some immediate losses.
Clients who are wanting to be more active may wish to consider selling equities with view to buying cheaper later on. This is a speculative strategy and spotting the short term movements of the Market is historically difficult.
Clients that may have need to access equities in shorter term are well advised to check their cash position with view to considering impacts of losses from equities.
If any client needs to speak then please email me asap. If you wish to sell without discussion please email instruction to chris@reevesifa.com or send secure email to transact through your personal transact account. Remember that all collective investments are transacted at 1pm.
