Unlike January, February has proven not to be quiet and uneventful. While equity markets around the world have recovered to some degree following the hiccups of early February, this is a salient reminder that we are entering into a more volatile environment as central banks around the world look to start to lift interest rates, or indeed continue the process as is the case in the US.
But it’s important to remember that volatility is part and parcel of investing in growth assets such as shares and property and, in fact, is the very behaviour that professional investors rely on in their daily search for good, long-term companies to invest in.
Briefings with the investment heads from both Perpetual Investors and PM Capital in the past few days carried similar messages: that world economies generally speaking are fundamentally stronger now than at any time since the GFC; growth is ‘synchronised’, that is, all major economies are showing signs of reasonable growth for the first time since 2003; and the underlying causes of the positive growth outlook, for example productivity increases, are more meaningful which indicates the growth may be more sustainable than has been the case in recent years.
The main risks are thought to be “emotion” referring to reactions to ongoing geopolitical clashes, and inflation which is the trigger for interest rate rises which would cause bouts of sharper volatility particularly in the shorter-term as we saw in early February. The danger particularly is if central banks raise interest rates faster than expected, and President Trump’s tax cuts and stimulus plans may enhance the likelihood of this outcome. Hamish Douglass from Magellan (see video below) is cautious too, talking of the possibility of a significant market correction if rates increase faster than expected while at the same time acknowledging the strength of the major companies on their investment radar. Anton Taglieferro from Investors Mutual seems a little more circumspect about it all – his video is also worth a look, below.
It’s a tricky one because (a) things are as likely to roll on unaffected as they are to suffer a correction – Hamish rates it 50/50; (b) piling totally in or totally out of a single asset class is a certain recipe for failure; and (c) we know that the returns from bonds and cash is at historic lows so alternatives are limited. The overwhelming sense from recent fund manager briefings has been of optimism but with a healthy awareness of risk in the form of volatility.
So we’ll close off with exactly the same sentiment as last month’s Newsletter: The message for us and our clients is to remember is that we know volatility is always present and it is therefore critical to ensure we’re applying that appropriately to an individual’s circumstances. It is usually a different picture for a young family, versus a late-40’s/early 50’s family with no debt and no more school fees, versus retirees and soon-to-retire families. **Note too last month’s Tip…. Keep up the Review meetings!
To bring home the improvement in US Jobs since 2010 – such an important economic indicator – check out this slide from a recent presentation from Kapstream:
Sources: RBA, ComSec/CFS, Investors Mutual, Magellan, PM Capital, Kapstream/Janus Henderson.