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Market turbulence 2018

  • Investment Insights
  • 3 minute read

By Nancy Curtin

Markets came under fresh pressure yesterday as the VIX index (a measure of market risk) and US bond yields moved slightly higher. The UK Central bank also signalled concern about growing domestic inflationary pressure in the UK and was likely to move rates higher, possibly at their next policy meeting. This message was consistent with concerns around emerging wage gains in the US earlier in the week.

It should be noted that we have now reached declines in major markets corresponding to a full correction, defined as a drop of 10% in markets. This is usually the end of the massive selling pressure in a bull market. However, markets can often re-test lows several times before they stabilise and we should expect continued volatility ahead. These types of market reversals also need time for market participants who may be wrong-footed to sellout.

But remember, fundamentals are still strong in the form of global growth and earnings and these will remain a support for markets. We have exited the world of low growth, fears of deflation, anaemic earnings and loose liquidity. We believe 2018 will be a transition year to a new paradigm: synchronised global growth supported by greater use of fiscal policies (both tax and spending), solid earnings growth and somewhat higher inflation.

Fourth quarter earnings season has confirmed this picture, with companies generally delivering double-digit earnings growth and positive guidance for the year ahead. This is normally a good environment for shares and we believe that this will be the case. However, the transition to tighter monetary policy needs to be digested and fully assimilated by markets.

At times like these, it is important to remember that equities are risk assets – they offer higher returns but are also characterised by volatility. The lack of volatility (risk) that characterised 2017 was the exception and not the rule and we are now going back to normal with a vengeance. Remember we are looking to achieve returns above inflation for clients and this will not be achieved by moving to cash. Investors who stayed the course through past periods of volatility have even found that short-term corrections ultimately have worked in their favour as it also makes it possible for us to purchase shares with strong fundamentals at attractive long-term valuations.

Market turbulence is a fact of life in equity markets – a fact that some investors may have overlooked amid the remarkably low volatility seen over the past couple of years. Short-term downturns can be disconcerting. However, we believe that a sound approach is for investors to shift their focus away from short-term trends and concentrate on their long-term investment strategy.

 

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