Current Markets

Investors are gripping their seats as markets experience real volatility for the first time since Covid hit in early 2020 as Central Banks try to tread the thin line between curbing inflation (through interest rate hikes) and avoiding a recession. I stress volatility which is different to risk. The first is the daily rhythms of the stock market as prices react to the latest economic and geopolitical headlines, the second is the far more serious threat of permanently losing your investment as businesses fail. No investor can avoid volatility but choosing high quality managers with experience of previous economic cycles and the ability to identify high quality companies capable of weathering the storm will protect from the risk of permanently losing money.

It is difficult to argue that Central Banks failed to recognise the threat of higher and longer lasting inflation as the global economy recovered from the Pandemic and was met with the competing forces of pent-up demand meeting supply side constraints. Now as higher food and energy prices hit and interest rates are on the rise the Newspapers full of headlines proclaiming a recession is just around the corner - so how should investors react? Trying to time the market, either by moving to cash or switching to those businesses currently benefitting from higher prices would be a mistake. Inflation is forecast to fall back to more acceptable levels in 2023 and UK and US interest rates are likely to peak somewhere around 2% and 3% respectively. High quality businesses, in both traditional, so called, Value sectors such as Energy, Healthcare and Utilities and Growth stocks such as the Tech companies which drove the markets higher over the past decade can survive and thrive in such conditions. As ever holding a balance of both styles is recommended. Good fund managers invest in good businesses for their long-term potential and do not trade in and out on short term market sentiment.

Finally, it is worth reflecting on how markets actually perform in periods of economic stress. Contrary to common perceptions, markets typically perform better during a recession than in the 12 months leading up to them and, most importantly, going back over US recessions in the last 70 years the markets are on average 20% higher two years later. Whilst no-one can predict the future the traditional rules remain true - accept short-term volatility and invest for the long term, find high quality managers who can identify strong businesses and ensure you are well diversified.

An article by Andrew Humphries, Independent Investment Consultant, Irongate

12th May 2022