Equity markets around the world have been volatile of late, and whenever this happens, investors naturally look for explanations for the downturn and wonder whether they’re in the right investments. We believe this response to volatility, although natural, is likely unhelpful. Instead, you are better served by putting recent market movements into the context of what’s important to you in the long term. For example, looking back a decade to the massive market decline of 2008, consider this question: Would you be closer to meeting your long term financial goals by having sold out of equities after double-digit losses only to miss the rebound and one of the longest bull markets in history? Putting market volatility into context is a much better way to react than trying to understand every market move or selling at the wrong time to quiet fears.
- Predicting how macro-economic issues will work out or how they’ll affect markets is next to impossible.
- Volatility can be upsetting, but selling after significant losses can be counterproductive.
- We believe valuations, not volatility are the key to portfolio reallocation, although sometimes high volatility may open up attractive valuation-driven purchases.
The good old days seem to be quickly sliding into the past. As recently as a year ago, markets were on a joyride. Ever higher returns pushed painful memories of the Global Financial Crisis (GFC) further and further into the background. The fear index, also known as the VIX or more formally the CBOE Volatility Index, rises during periods of market stress. But in 2017, the VIX couldn’t have been less scary, as it set record lows amid a seemingly ever rising market. In fact, from January 1990 through December 2016, the VIX fell below 10 on nine days (nine days in 27 years!) but in 2017 it sat below 10 for 52 days so calm were the markets.
Volatility has clearly returned to markets in 2018. Earlier in the year, fears of rising interest rates and multiple trade conflicts set the market on edge. Many investors continued to have confidence in leading growth stocks for much of the year until threats of stiffer regulations and the failure of a few internet darlings to live up to lofty expectations caused a dramatic rethinking of their worth. In addition, markets have had to wrestle with slowing economic growth in China, the possible end of Quantitative Easing (printing money) by the European Central Bank, volatility caused by the US midterm elections and property prices crashing here in Australia. If balancing all those risks to form a better forecast of how they’ll play out or affect markets seems like a tough job, we couldn’t agree more. Clearly it’s hard to predict these issues in isolation. But in reality, these issues interact and evolve, and people react to them along the way, thus multiplying complexity and making outcome predictions next to impossible. No investor can consistently know how today’s concerns might affect markets in the future. Some current examples of this are:
- The US-China trade wars and tariffs,
- Interest rate increases by the US Federal Reserve in response to strong economic growth,
- The unresolved UK Brexit and political turmoil in Europe,
- Australia’s possible change of Government in May to Labor and proposed cuts to tax benefits, including the removal of excess franking credit refunds and the reduction of tax deductions for negative gearing,
- The Reserve Bank of Australia keeping interest rates at the historically low level of 1.50% for over two years,
- Restrictions on investor and interest-only loans by APRA and Banks curtailing lending,
- Property prices falling significantly in Sydney, Melb, Perth and Darwin,
- Australian Banks being exposed for misconduct by the Royal Commission, paying billions in fines and forecasting less profits,
All demonstrating how quickly investor sentiment can change and evolve.
Whether the market is, or will become completely comfortable with all or some of the concerns above remains to be seen. In the US, reaching a new North American trade agreement gave some relief, but progress has been elusive in talks with China, a situation that appears poised to potentially flare at any moment. Europe’s slow growth is fragile, and it looks likely Australia will have another change of Prime Minister in May 2019. But again, knowing when a flare up around these issues might happen, how long it would last, and how it might impact investment markets strikes us as a monumental task.
Fintech’s investment management committee think there’s a better way to invest. Specifically, we don’t believe every market hiccup needs deep analysis, nor do we read tea leaves. We prefer to focus our work on fundamental research, contrarian signals, and investment valuations. In the long term, you get paid by the current and future cash flows of the shares and securities you own. We seek to buy securities when prices are low compared to expected cash flows. This valuation work is the driver of our research, and it relieves us from becoming overly concerned about the next central bank rate decision or the outcome of an election.
Should We React to Spikes in Volatility?
The short answer: No. We focus on long term valuations, the true and durable value of an asset class, rather than the volatility of its market price. Having a long term perspective makes the next turn in interest rates, political posturing, the US-China trade spat or the Brexit deal less concerning to us. Instead, we ask, “How might this affect fundamentals over the next several years?”
Investors who trade on emotion and short term market moves are more likely to sell after markets have gone down and buy after they’ve risen. We seek to do the opposite, in part by sticking to our principled approach to investing, which is designed to keep us rational in a sometimes irrational world. In this regard, Fintech’s investment management team is prepared to be buyers if and when valuations provide an attractive buying opportunity.
Making sure your financial strategies accurately reflect what’s important to you and your specific needs, is critically important. Fintech Financial Services provides advice relating to your level of income, tax, assets, debts, risks (personal and business), family needs, health, savings and desired lifestyle. A key element is constructing your investment structure and portfolios in line with your Investment Risk Profile, tax effectiveness and to provide the level of certainty you require over the long term.
Please contact our office if you would like to review your situation and determine the financial strategy options that will assist you secure your future.