The first few months of 2022 have been a very difficult period for most offshore investors – especially those invested predominantly in equities for long-term growth. January 2022 started with a “correction” in the US markets, followed by the invasion of Ukraine a month later.
Soaring inflation levels in the US (and globally) as well as the uncertainty surrounding the level of interest rate hikes expected by the Fed to curb rising inflation levels have all added to the uncertainty and volatility experienced in global markets over the last couple of months. In March 2022, the annual inflation rate in the US accelerated to 8.54%, the highest since December 1981.
Since early March, China’s cases of Covid-19 have been increasing. By the end of March, the virus had spread to 29 of China’s 31 provinces and they were placed under varying levels of lockdown. This has caused further tension in global markets after positive signs had been observed from mid-March to mid-April across major market indexes such as the S&P 500 and Nasdaq. The loss of subscribers in tech giant Netflix’s quarterly earnings report during April as well as the uncertainties surrounding interest rate hikes in the US also contributed to a substantial slump in the technology sector – April 2022 delivered the worst monthly performance for the Nasdaq 100 since 2008.
Drawdowns from 52-week highs
What makes current market conditions quite unique, is the number of factors simultaneously affecting investor, market and economic sentiment.
Our portfolios are well diversified from an asset class, sector, style, geographical and risk perspective with a strong focus on delivering optimal long-term returns. It should not be a time to become worried and to focus too much on the short-term conditions affecting markets at this stage. Be assured that when markets turn/normalise portfolios will benefit from the growth to follow. The below table illustrates how the S&P 500 as an example has performed over a one- and 2-year period after a substantial market correction:
After Russia invaded Crimea in 2014, Warren Buffett said, “The one thing you can be quite sure of is if we went into some very major war, the value of money would go down — that’s happened in virtually every war that I’m aware of. The last thing you’d want to do is hold money (cash) during a war”. Buffett started his career in 1942 (WW2) and has managed money through the Korean War, Vietnam and more recently 9/11 followed by the wars in Iraq and Afghanistan.
When we experience these corrections and bear markets it can be very emotional, but it does offer an investor the opportunity to purchase more shares in good quality companies at a much lower/more reasonable price.
With the S&P 500’s worst quarter in two years, Warren Buffet made $41 billion in net stock purchases in the first quarter of the year, the most since 2008. “As long as Buffett and his team are paying reasonable prices for quality companies, these investments should do well in any environment — inflationary or otherwise,” said Darren Pollock, a Berkshire investor who’s a principal at Cheviot Value Management LLC.
Markets should start to turn/normalise when we see some of the following events:
- China winning the current battle with Covid-19.
- China providing much firmer policy support to its underlying economy.
- Europe introducing aggressive fiscal policy support to protect the underlying economy from second-order effects of the war.
- Oil supply increase – Iran, Saudi Arabia as well as the US coordinate to increase global oil supply.
- Russia-Ukraine peace-deal.
- US Fed eases off reduced demand pressure/falling inflation by increasing interest rates more effectively.
Being invested in the market already there is no doubt that you would have experienced losses in your portfolio over the last few months, but it must be seen as paper losses and only through switching out/withdrawing from these funds will you be realising these losses.
Conservative investments such as cash are typically seen as safe havens during times like these but the safer the investment the lower returns you can expect. Market timing seldomly works, trying to time the market by selling your equity funds before they depreciate in value to buy conservative funds and then doing the reverse to capture the profits when markets start to recover again can be riskier. The odds of making the right decision at the correct time are stacked against you especially when there are so many variables affecting the market at the same time.
It is more important than ever to have a long-term investment outlook unless there are personal circumstances that your financial planner needs to be aware of that might influence the long-term objective of your investment.