Since the start of April, the trend of market volatility experienced in the first three months of 2022 has continued, which has resulted in further market downturns.
The following chart shows the performance from 31 March 2022 to 11 May 2022 of some of the major indices used in our portfolios.
Source: FE Analytics
The overall backdrop for global equities has not been very supportive recently, with a few key areas to consider.
Central banks are now walking a tightrope as they attempt to balance the pressure of inflation with an already slowing growth rate, which in turn is creating concerns for investors. The US Federal Reserve benchmark interest rate was raised by 0.5% to a target range of between 0.75% and 1%, the largest hike since 2000. Similarly, the Bank of England raised interest rates from 0.75% to 1%, the fourth increase in six months, and to the highest level since February 2009.
The ongoing conflict in Ukraine continues to have an impact on markets, as countries are rushing to cut their dependency on Russian commodities. Also, there is no sign of China relaxing its zero-tolerance approach to Coronavirus, further impacting on global supply chains.
Value, one of the preferred factors towards which we tilt our portfolios, has performed the best over the period. As covered in our recent investment review, Value historically outperforms markets during periods of inflationary concerns, which is one of the key reasons why it is included in our portfolios.
This has had a knock-on effect, with the UK faring a little better in comparative terms than the S&P 500 and MSCI World in particular, as it contains a larger exposure to value than these indices, which have a greater exposure to growth style companies.
As always, we advocate long term investing, and accept that the above analysis is extremely short term but does provide a picture of the current global circumstances.
If we expand the timeframe out to three years since 11 May 2022, we can see that all of the indices reviewed have produced a positive return, indeed the US moves from the second lowest performing sector to the top performing sector:
Source: FE Analytics
It is important to remember that market volatility is part and parcel of investing, and it is for exactly this reason that we hold an exposure to Global Bonds within our portfolios. These assets are held to dampen volatility to a level which satisfies emotional and financial needs.
Market declines are temporary; however they can understandably cause investors short term anxiety in the pursuit of long-term gains. Markets themselves are not capable of causing losses for widely diversified investors, losses can only be produced where an investor reacts to market falls in an attempt to avoid further falls. Consequently, it is the actions of an investor who crystalises market falls by selling their holdings that creates losses.
Where it is anticipated that you require liquid funds in the short term, as part of your Financial Plan we will have considered, and likely made provision for these proceeds by moving funds into cash in readiness. This approach helps to avoid the need to reduce your equity position at a time when it may not be advisable from an investment perspective. This allows you as an investor to remain invested during periods of downturn, thereby benefiting from the subsequent upturn in markets, whenever that might be.
As ever, we are here for you if you wish to discuss any matter raised within this article or indeed have any other concerns in relation to your portfolio.