By Rebecca Ellis
MON. 06 MARCH 2023-theGBJournal | February was blighted by a devastating earthquake in Turkey and Syria which left tens of thousands dead, spurring international rescue efforts.
In the meantime, the Russia-Ukraine war ground on, deepening geopolitical tensions and hampering regional trade.
The ongoing conflict, coupled with stubborn global inflation helped push the MSCI World Index, a benchmark 68%-weighted in favour of US stocks, two-and-a-half percentage points lower in February.
Following a euphoric January which saw a more than 6 percent bounce in global equities, February was a sobering reminder that the dual scourges of 2022, inflation and rising interest rates, are not yet behind us despite a generally resilient global jobs market.
Through January and February, 90% of large, listed companies announced their annual numbers for 2022. Beyond their stock prices, listed businesses are focused on tangible results and the year end is an appropriate time to assess how they managed a turbulent financial year. The vast majority have weathered the change in economic conditions, including sharply higher interest rates, but signs were mixed. The murmurs of recessions were heard, but not loudly, leaving leading economists uncertain as to how the year will play out.
In their effort to manage unpredictable demand, companies are evidently nervous. Combined with heightened geo-political pressures which are increasing rather than retreating, we need to adopt a defensive approach to the gyrations that have underscored the first two months of 2022 for global financial markets.
We can also contemplate history to understand what pre-recessions look like and try to deploy past lessons to an evolving situation. It may be prudent to modify equity exposure and switch to less volatile asset classes such as cash and high-quality fixed income.
As events play out, what rationale can be given to investors?
Diversification in all spheres
In the aftermath of the great financial crisis, triggered by a vastly overleveraged banking sector, government efforts at quantitative easing gave rise to a lost decade of interest rates. With cash yielding a zero or negative return and bond yields rarely reflecting actual risk, equities remained one of the few options left open to investors seeking a realistic return. With the revival of rates offered against cash and bonds, it is time for investors to realign their portfolios to reflect their risk appetites.
Target profits and, when they materialise, remain focused rather than greedy.
Our philosophy is to take opportunities when they arise. Certainly, as Warren Buffet says and follows “Our Favourite Holding Period Is Forever. Even so, taking the cream when it is there is an important aspect of tactical risk management in turbulent markets. We can see by the below VIX chart (the global reference to market volatility, known as Wall Street’s fear gauge), that investors are in a slightly above average state of anxiety. It is important to stifle the impulse to act on fear of missing out or greed. Using the average dollar in and out techniques for investing is important to ensure your emotions don’t erode your returns.
Work methodically towards the end goal. Compound profits in cash and reallocate them to new opportunities
When riding the rollercoaster of volatile markets, it makes sense to increase exposure to more robust sectors that can better withstand macroeconomic turbulence. On the fixed income side, higher interest rates are breathing life into the sovereign and corporate bond markets. In particular, investment grade corporate bond issues with steady free cash flow and a short maturity offer a solid degree of confidence against limited risk.
The best defence is to exploit opportunities as and when they arise. I would be delighted to chat through any of these ideas; feel free to drop me a line to organise a chat.
Rebecca Ellis, Family office advisor |www.aktspartners.ch
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