1. How would you describe the investment market cycle we have seen over the last quarter?

In the last quarter we have seen sustained falls in asset prices, with equities entering a “bear market”, followed by indices recouping around half of their losses so far this year. 

Many of the falls in asset values we’ve seen during the last 20 years have been driven by specific events, such as the financial crisis or the COVID-related recession.

Currently, we’re observing a decline in markets that has been driven primarily by central bank policy tightening in response to inflation. This is the sort of cycle we have not experienced for several decades, and it may well play out over a slightly longer period than, say, the COVID-related market collapse and rebound.

Bear markets can have rallies and still be in a downward trend and we think that what’s happening now.

The biggest falls in value have been in speculative technology companies and those promising innovative disruption to more established market segments. The biggest hit was taken by those that remained unprofitable. There was a belief that the pandemic had accelerated disruptive change and the adoption of new technologies to the benefit of future profits and while it has been the case to a certain degree, the trend doesn’t seem to have prevailed to the extent that people had expected or, perhaps, hoped for.

A lot of these companies were funded with cheap capital and with the cost of this capital now rising, investors are asking to ‘see the money’ rather than rely on potential future profits. Therefore, there has had to be a major reset of expectations and of the valuations of these companies.

In addition, we’ve seen a lot of consumer-facing retail stocks hit by the cost-of-living crisis. In Europe there has also been downward pressure on certain cyclical manufacturing and industrial companies because of the threat of higher energy prices and the risk that they might have to shut down production in the event of energy rationing.

A good deal of the recovery in the last month has been led been by larger-cap technology stocks as the companies’ results haven’t been as bad as feared.

Furthermore, inflation expectations have come down over that period, suggesting that the central banks have been successful in anchoring inflation expectations. Already, futures markets are implying that interest rates will start to fall be the turn of the year. And so, markets are already beginning to anticipate a more expansive monetary policy environment, but before we’ve actually seen the worst of the economic slowdown.

There is a bit of a tug-of-war at the moment between hope for the future and a difficult short-term.

We acknowledge that we will never be able to time the bottom of the market. The best policy is usually to drip-feed investment over a few weeks or months.

The signs that the market is recovering might include: the market is no longer reacting negatively to bad news; central banks are willing to be less aggressive on monetary policy; and also that inflation – the key driver of the cycle – is showing signs of peaking. If you can put all those together with some better valuation starting points, those would be the pointers I would use.

The two key factors we talk about are your tolerance for risk and your investment time horizon. The longer you have in front of you to invest, the more that you can tolerate the volatility of markets. Indeed, if you have regular sums to invest in markets, the more opportunities you will have to buy assets with better potential for higher long-term returns.

We all have different tolerances for risk; some people can bear a lot of volatility and some people dislike it. You have to examine your own psychology to decide what balance of assets you’d want in a portfolio, from a full equity portfolio to one which is more balanced with bonds and other risk-diversifying assets. One’s other assets, ranging from real estate to pensions or work-related share schemes should also be taken into consideration, as should potential liabilities including debts or the need to support family members.

Please do reach out to our investment management or financial planning team if we can assist with your next steps.

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