Market Update 4: Moving forwards..
As investment markets have staged a remarkable recovery since the March lows, we feel this is a good time to reflect on what has occurred over the past few months and where we see the outlook from here. In the third week of February, we were seeing the start of a dramatic period of volatility, with global markets tumbling in the wake of the COVID-19 pandemic. In the space of the following four weeks, markets fell nearly 30% on a cumulative basis. The velocity of this bear market was severe, and we recognise that this was an unnerving period for investors. However, this is the typical nature of volatility in the aftermath of major economic/macro events. Our focus at that time and today has remained the same, as we stress the importance of calm heads and patience required for long-term investment.
In April, we saw areas of the stock market which were hardest hit by the sell off in February/March stage a recovery and as we stand today, equity markets are not far off the February peak. This strong recovery was not one we could have predicted but it does show the danger of over trading and panic selling at times of market pessimism, as you do run the real risk of missing out on any subsequent bounce. A plausible explanation for this recent market behaviour is that they (markets) are now more optimistic of a broader economic recovery and therefore the possibility of avoiding a prolonged recession.
Over the past few months, we have continued to be in regular contact with the fund managers who manage the underlying investments in our clients’ portfolios. Far from sitting on their hands and observing the dramatic moves in asset prices, they are utilising this time wisely to revisit the investment case of each of their individual holdings. This is a time when the importance of actively managed investment funds should come to the fore, as managers are able to make decisions in consideration of stock fundamentals, industry and regulatory pressures, as well as a view to structural forces that present risks and opportunities for companies in a post COVID world. We believe that these are essential considerations as our societies see the acceleration of many existing trends such as digitisation and sustainability.
In contrast to an active fund approach an index tracking strategy cannot take such factors into account and therefore investors are at the mercy of momentum driven market movements. We think this is the wrong strategy at a time when the world is shifting quickly, and distinct winners and losers will emerge in the coming months and years ahead.
There is a general consensus amongst the managers that we have spoken to that a level of caution is required and there are many conversations had about how they are seeking to increase the quality and level of conviction in their portfolios at this time to weather the period ahead. They will also seek to utilise market falls to initiate positions in high quality companies that have hitherto been expensively valued. This work should all be adding value for investors in the long term.
We do not think the recent market recovery means that volatility will now dissipate or that upward trends in markets will continue unabated. On the contrary, we think the level of uncertainty present for corporates and global economies means that further periods of market fluctuation would seem likely. Our consistent message to investors is to remain calm and focus on achieving long term capital growth through a diversified portfolio of assets with strong underlying fundamentals which is managed within an agreed risk parameter. We believe that a patient and calm approach is rewarded. In the meantime, we continue to actively analyse, review, and challenge our investment recommendations to ensure that our clients are benefitting from well informed and objective investment advice which will achieve their medium and longer-term objectives.
In aggregate, and despite the ongoing uncertainty, we believe that there is cause for optimism. The bespoke investment and financial planning strategies that are in place for each client are navigating this period of uncertainty, whilst being well placed to benefit from the economic recovery which should follow in time.
In the meantime, if you do have any concerns, please do contact your adviser to discuss this further.