z-kolkiemz-kolkiem

Are equities cheap or expensive?

Should I invest now or wait for greater falls? Rebecca Cretney discusses some of the questions she gets asked and explains why personal financial advice can prove far more valuable than economic forecasts.
Published 20 September
5 mins

Should I invest now or wait for greater falls? Are we heading into a recession? What about stagflation? Are equities cheap or expensive?

In response to these questions, consider this data.

 

The last 12 months*

The last 3 months*

Developed market equities

-11.3%

-3.9%

Emerging market equities

-15.8%

-3.3%

Global investment grade bonds

-13.8%

-3.0%

Global high yield bonds

-13.0%

-3.7%

Global Property**

-15.9%

-7.2%

*All returns quoted in USD, as at 31 August 2022. Source, Bloomberg

**Using the S&P Global Property index

And this graph, which shows the performance of global equities, from December 2000 to date:

Against this backdrop, it would be easy to argue that you should invest now providing two criteria could be satisfied:

  1. You have a long enough time frame (traditionally 7 years or more)
  2. You have the courage to remain invested for at least this time.

But the questions above really push for shorter term answers because they are driven by some of our most primary emotions. We want to know whether there will be a better time to invest, whether we expect further short-term market losses. In our minds, we imagine worst-case scenarios: 70s style inflation or a crash of the magnitude experienced during the global financial crisis.

There is natural fear of the unknown behind these questions because the reality is we are living in a period of high inflation, low growth, increased energy costs, labour market squeezes and rising interest rates, while a war between Russia and Ukraine rages on. Darker questions form at the periphery: will Putin take the nuclear option? Will China take the opportunity to invade Taiwan? Will civil unrest once again become prevalent in the US? How will Europeans heat their homes this winter?

I am periodically asked these questions. And, although we try to forecast what could happen if one of these scenarios panned out, the truth of the matter is we don’t know. None of us knows what the short term might bring. Most short-term forecasts predict that if there is a recession in the US, it will not be a protracted one. But we don’t know what is around the corner. Putin might take the nuclear option. China might very well invade Taiwan. And the flipside is also true. The US might get its soft landing, manufacturing data may continue to surprise on the upside and the energy crisis might be resolved. Against this, you must choose between a guaranteed loss of 8% per annum, or more considering inflation rates (as personal inflation figures vary greatly), and a possible temporary loss if money is invested.

You see, forecasting must necessarily be based on models. These use historical and current information to provide a range of probable outcomes, and they vary greatly – they could be mathematical or intuitive, fundamental or extremely complex. To do this, models use assumptions, aggregations and probabilities. For example, you can make assumptions about what would happen to markets if inflation in the UK were to drop to 6% next year. The goal would be to forecast options that would be closest to the real picture.

This is incredibly complex. Not only because of variables and data to be considered, but also because it seeks to attribute some degree of logic to human behaviour, in millions of consumers and market participants. Models need to predict how politicians, policy makers, consumers and investors would react in such a scenario. How can we predict what one of these key players will do, let alone billions of them? This is not to say forecasting does not have its place; it is an integral part of what our team of analysts do. To each scenario we attribute a series of probabilities based on research, data and experience, and indeed this points us in the right direction most of the time (hence our first quartile performance of late – for more information on this, please watch this short video).

But short-term forecasting tends to fail most frequently at times of pivotal change. That is why it is the long term and not the short term you should consider when investing and why the question of time frame is so important. That is also why the old adage of “time in the market, not timing the market” proves true. Put a different way, if we could set the clock forward and travel into the future seven years from now, I have no doubt we would emerge to see we are in the money – we made the right decision to invest. Because, regardless of what the next 18 months bring, in seven years equity markets will be higher than they are now, barring a catastrophe of proportions we have not yet considered.

However, it is not in our nature to ignore the short-term noise. And none of us have access to a time machine. This is why the question of composure or risk tolerance is so important. Are you able to remain composed when the headlines scream disaster?

The worst investment outcomes are caused by an old ally: fear. Fear is hard wired into our brains. Fear protected us from being eaten. We attribute probability to wildly improbable scenarios based on fear. In the investment world, fear can lead you to disinvest at the wrong time or stop you from investing at all, causing perpetual paralysis. Fear is the financial equivalent of shooting yourself in the foot.

Fear of the unknown has been and continues to be a far greater cost to many investors than the market drops they seek to avoid, especially now, with inflation rates soaring around the world. This is one of the many reasons why advice should be sought. You need to know how much risk you must take to meet your own personal goals and how much risk you can afford to take so as not to compromise your lifestyle. This is far more important than short-term market forecasting.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how we manage money, or call +44 (0)1624 645000 to speak to our client services team.

 

If you would like to find out more about how we can help clients manage their investments, please contact us on the same number as above, or complete a form using the links towards the end of the page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’
portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.

about the author

Rebecca Cretney

Rebecca Cretney

Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.

 

She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.

 

Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.

Access more of our insights

Money management

When is enough enough?

3 May

   |   5¼ mins

Society encourages us to endlessly strive for ‘more’ – whether that’s money, recognition or to be seen as successful. Some people, however, understand that achieving ‘enough’ may result in a happier life. Huw Williams explains the thinking.

Money management

How herd mentality affects more than just your investments

3 May

   |   4¾ mins

From blind loyalty to large-scale organisations, to endlessly trying to keep up with influencers, we explore how sheep-like behaviour can damage your wealth plans beyond investments alone. Simon Prescott explains.

Investing

What could a new world order mean for investors?

22 Apr

   |   9 mins

While the G7 nations have traditionally led global economic growth, there have lately been efforts by the largest developing nations – particularly China and Russia – to seek to overturn that for a ‘new world order’. James Robertson sets out what this might mean for investors.

Investing

The oil saga continues

23 Mar

   |   9½ mins

The swings in oil prices – despite pulling back from recent highs not seen since 2008 – speak to some of the fallout from the Russia-Ukraine war. But without a peace treaty in sight, the story of what’s happening with oil (and other commodities) is far from over, as James Robertson explains.

Get in touch

If you are interested in becoming a client, please complete the form via the ‘become a client’ button below. Alternatively, if you are already a client, or if you have a question about how we help clients in particular circumstances, please use the ‘contact us’ button.


We will get back to you as soon as we can during office hours, which are Monday to Friday, 8am to 8pm (UK time), except for UK public holidays.

Become a Client

Thank you for your interest in Nedbank Private Wealth. Please call us on +44 (0)1624 645000 or complete the requested information and one of our team will get back to you soon. We look forward to speaking with you.  Please note: If you are an EU resident, we are unfortunately unable to offer our services to you at present.

* Required fields

Contact Us

Please call us today on +44 (0)1624 645000. Our office hours are weekdays from 8am to 8pm (UK time), except for UK public holidays.

 

Or please complete and submit the below form and one of the team will get back to you as requested.

* Required fields

Search suggestions