Some investors may be shocked that stockmarkets can go down considering the extended bull run we have seen in financial markets over the last couple of years. However, given that, as we write, major benchmark market indices are generally showing a decline of around 5% (in local currency terms) for the month; in context, this is quite a small movement (so far) compared to previous market sell-offs.
What has caused the sudden change in investor sentiment? Risk aversion has been driven by the US. Strong economic and market growth, further buoyed by the recent tax reform bill, has caused investors to focus on inflation and the future path of US interest rates. Initially, the panic that ensued was confined to a sell-off in Government bond markets at the end of January. However, this has now fed through to equities in February.
It remains to be seen whether we will see sustained market volatility. In August 2015 and January 2016, we witnessed far steeper daily declines only for stockmarkets to regain their poise and forge ahead within a month. Whether the current investor nervousness abates as quickly remains to be seen but we would urge investors not to panic.
Looking ahead, US interest rates (and Central Bank policy overall) and currency movements are going to be key indicating investor returns as we move through 2018. The threat of rising interest rates triggered January’s sell-off in Government bond markets as inflationary concerns increased. The yield of 10 year US Treasury bonds hit 2.8% – the highest level since 2014 and the sell-off resonated across global bond markets. UK gilts saw a loss of around 2% in the benchmark index over the month. Bond guru Bill Gross who called the end of the bond bull market at the end of last year does not expect a dramatic sell off.
As we move through February, it seems that the recent declines are global stockmarkets taking a bit of a breather, with investors being spooked by inflationary concerns. Although no-one likes to see their portfolio values fall, in the short-term a reality check that markets do not go up in a straight line may prove timely. Stopping irrational exuberance and markets being driven by the FOMO (Fear-Of-Missing-Out) brigade taking on too much risk and ignoring fundamentals and valuations is welcome in our eyes.
We cannot predict which way markets will turn in the coming weeks, but our top down view remains focused on the belief that there is value to be had in equities versus cash and bonds, with a number of areas offering long-term growth prospects and attractive dividends.
We believe, whilst a well-diversified portfolio can continue to provide cash beating opportunities in a number of areas, for those prepared to ignore short-term noise, focus should be on valuations and taking a longer-term perspective.
The above article was first published by Whitechurch Securities, February 2018