If you follow economic news or data closely, recent headlines might well have made you want to run as far as possible from investment markets. You’ll no doubt have witnessed conflicting economic data and been concerned about the impact of rising interest rates and, most recently, turmoil in the banking sector. If you’re already invested, you may have been tempted to pull the plug and move into cash. If you aren’t invested but were planning to, it may seem wise to delay.
In the following article, we answer some of the tough questions that may be going through your mind.
Are we heading towards another global financial crisis?
In our opinion, no. The recent banking upheaval is not the same scenario as 2008 because:
- Banks have more capital and are now better regulated – especially large systemically important banks.
- Regulators are more aware of the importance of acting fast to maintain confidence and avoid panic selling and withdrawals.As seen in their timely response to the recent issues at Silicon Valley Bank and Credit Suisse.
- There are no widespread credit issues as there were in the 2008 crisis, which stemmed from a housing market crash in the US. The unrealised losses we’ve seen in some banks at the moment are due to higher interest rates and the effect these can have on government bonds. As long as banks have access to liquidity and they can borrow against these bonds, there should not be the material losses we saw in 2008 with mortgage-related debt.
Having said this, investor sentiment is something to watch out for. If investors start panic selling, this could lead to further market sell offs. But if you’re anything like me, you may well see this as a buying opportunity.
So what is the outlook now?
In our view markets will continue to be buffered by headwinds over the next 12 months, but there will be tailwinds too, which don’t tend to feature in the news headlines.
Market volatility is likely to remain elevated and economic growth is expected to slow. We anticipate this will be particularly pronounced in developed economies, but especially in Europe where energy restrictions impact output, high inflation reduces real wages, and tightening monetary policy slows aggregate demand. While still low, the risk of significant global disruption from the Russia-Ukraine crisis remains real.
Inflation will peak but remain high. Improving energy and food prices should help headline inflation fall, however, the relatively tight labour markets and higher wage increases may mean core inflation (which excludes energy and food) remains relatively high. The supply and demand issues that have beset markets since the pandemic and the start of the Ukraine war are expected to ease. Labour markets are also likely to settle, with unemployment to rise albeit slowly.
Central bank policy rates are expected to peak in 2023, but with tight labour markets risking second-round effects from higher wage increases, they are likely to remain higher for longer than initially anticipated. However, it is important to note that a significant number of interest rate hikes are already priced into bond markets. And we expect markets will start pricing in future rate cuts towards the end of 2023 and into 2024 as inflation and growth slow.
With cash now paying meaningful returns, would it not be better to invest in cash?
Although cash rates are currently high, it is unlikely they’ll remain so over the long term. Our current expectation, which is in line with many market participants, is that cash will average 3.5% a year over the next five years. This might sound high after years of ultra-low interest rates, but will this level of return be sufficient to meet your financial goals and outpace inflation? The answer to that question is particular to you but in most cases, cash is not a suitable vehicle for a large proportion of your wealth. In addition, if interest rates remain below inflation, your cash investment will be losing value over time.
If you’re already invested, markets are broadly down so you would need to sell your assets at a discount to move into cash. You probably wouldn’t choose to sell your house in a housing downturn unless you really needed to. The same applies to market investing.
If you’re not invested, from a buyer’s standpoint many markets are attractively priced (with some notable exceptions) so you could forgo the opportunity to buy into the market at a discount. Think back to the Covid downturn – wouldn’t we all want to buy equities at those prices?
The current uncertainty in markets may be a distraction, but if your investment time frames are over three years it should not be a deterrent. Volatility is a normal part of investing and trying to time the markets is pretty much impossible. Best trading days typically follow the worst – you blink, you’ve missed it.
Am I taking a big risk by investing now?
It depends on what you define as risk. If you mean volatility then yes, you should be prepared for a bumpy ride. But if you mean “do I run the risk of losing all or a great proportion of my money?” then no. Or at least not with our portfolios. All of our client portfolios are hugely diversified. We hold thousands of positions across different sectors, styles and markets.
In addition, it is our job to tread the fine line between reducing volatility and maximising opportunity. We have been cautiously positioned for some time in the expectation that the rising central bank interest rates will result in slower economic activity, which in turn will create a more challenging environment, so our investment portfolios are well positioned for this.
Ultimately, when weighing up cash against markets, it is the opportunity cost you should consider and how this plays out with your wider financial goals. The right decision for you requires professional advice and our team of wealth planners can provide you with a bespoke plan to help you achieve those goals.
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Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how wealth planning can help them achieve their financial goals and objectives, 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 you with wealth planning support, please contact us on the same number as above, or complete the contact us form using the link below.
Investment values can go down, as well as up, to the extent that you might get back less than you originally invested. The value of your investments may also be affected by exchange rates. The inclusion of any investment structures and wrappers is for information only and should not be taken as advice or a recommendation. You should seek the necessary advice, specific to your circumstances, before making any financial decision.