The first question, however, is actually a far better question. This is because a statement on the future direction of travel for equity markets is an educated supposition, based on data, experience, research and a series of assumptions. Even if we predict the right direction of travel for global markets, it is practically impossible to predict by how much markets will rise, or fall, and how quickly. Now, think through the additional permutations available since we also hold a number of currency, fixed income, property and alternative investments.
As I told my friend, the question “is now the right time to invest?” should be answered with a set of questions, as the answer does not hinge on the stock exchange, but on you. Ask yourself why you want to invest, what are your goals and objectives, and what happens if you don’t achieve them. When do you need the money by? How much of your wealth are you investing? For whom are you investing – you or your children? How much risk do you estimate you need to take to meet your needs? How much risk can you afford to take?
Having acknowledged all of this, I of course obliged and answered the real question which was asked: what do you reckon stock markets are going to do and why? So while what follows is some of the analysis behind that response, I would ask the reader to bear in mind that the answer to the title question actually revolves around them.
The International Monetary Fund (IMF) anticipates that the global economy will shrink by 4.9% this year, in what will be the worst recession since the great depression. Advanced (or developed) economies will see the gravest numbers, according to the IMF. These forecasts are based on the economic conditions remaining broadly similar to the current situation i.e. without any more country-wide lockdowns being imposed.
This is despite these economies being buoyed up by huge levels of stimulus1. Global indebtedness is reaching levels, as a percentage of GDP, that is even surpassing the post-World War II peak. This is important as it means governments will need to control the costs of that debt, which has significant implications for investors. Some might even argue that we no longer have access to a ‘free market’.
Meanwhile, consumer and company spending has fallen through the floor, despite the support of governments, so corporate earnings have also been affected. Taking the S&P 500, as an example, the earnings reported so far are around 45% lower than 2019’s second quarter, marking the most significant drop since the 2008 global financial crisis2. This is despite 80% of the companies who have reported beating earnings estimates and 66% of the companies beating revenue estimates.
You would imagine that with this backdrop of gloom stock markets would be trading deeply in the red. But if 2020 wasn’t strange enough, it is even stranger if you take a cursory glance at stock markets – and particularly in the US. These paint a very different picture to that presented by the underlying data. In their support of the economy, central banks are seen by investors as being prepared to do “whatever it takes”.
On 27 July2, you would have needed to pay US$23.70 for US$1 of earnings from S&P 500 companies, the most in a decade. For the Nasdaq 100, you would have needed to pay US$33.50, given its technology bias. Equities dipped in the past two weeks, but they have picked up a little, as at the time of writing, and could start to plough higher still. This is despite the economy sitting at its weakest point at any time in the past 90 years and COVID-19 cases and deaths climbing. While rising markets are not our base case scenario, a correction might not happen for three reasons:
Given this limited degree of speculative excesses and the massive fiscal injections by governments, as well as the extraordinary actions by the central banks I mentioned earlier, it is entirely possible that even if there is an equity sell-off, it could be limited.
This is despite what’s happening in the real world. In ‘normal’ times, consumer confidence and the stock markets walk side-by-side. But recently, they have become disconnected and are now going in different directions: the stock market is going up and consumer confidence down. As such, there could be a trigger for a decline in share prices at any time.
Given this limited degree of speculative excesses and the massive fiscal injections by governments, as well as the extraordinary actions by the central banks I mentioned earlier, it is entirely possible that even if there is an equity sell-off, it could be limited.
This is despite what’s happening in the real world. In ‘normal’ times, consumer confidence and the stock markets walk side-by-side. But recently, they have become disconnected and are now going in different directions: the stock market is going up and consumer confidence down. As such, there could be a trigger for a decline in share prices at any time.
We have never seen a recession due to a health scare. We have willingly stepped into economic difficulties in order to protect lives and healthcare systems. However, history shows us that the world usually responds positively to traumas. In speaking to many clients and business owners, I often hear “it has forced us to push through change”. And the speed of change is accelerating. The way we do business in order to protect the environment is changing far faster than Greta Thunberg ever thought possible.
As investors, this accelerated rate of change presents an opportunity (for enhanced returns and reduced costs), but also risk. The opportunity is to invest in companies that are able to adapt to the pandemic and get on with business as unusual. But as we have seen, these are very few and far between and are already very expensive. So, the risk is that you don’t carefully evaluate your portfolios and monitor what’s going on, and you end up buying companies that are unlikely to survive in the new environment.
And while there are many reasons why the stock market could go up or down, there are ways to mitigate these risks through diversification and the active approach to research and monitoring that a wealth manager such as Nedbank Private Wealth provides.
There is no single, universal answer to the question “is now the right time to invest?” and the answers will change often and quickly. But there are long-term, reliable answers to the questions we ask to help you establish an appropriate investment plan. In setting out why you invest, and what it will take to meet your short, medium and longer term goals, you may even realise that the stock market question is of secondary importance to you.
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Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand more about how we manage money on their behalf, or call +44 (0)1624 645000 to speak to our client services team.
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Sources: Nedbank Private Wealth and (1) IMF; (2) Bloomberg, figures are trailing earnings; (3) BCA Research; and (4) Consumer Confidence Board.
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.
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.
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.
+44 (0)1624 645813
Nedbank Private Wealth manages mainly multi-asset portfolios, so our communications don’t tend to focus exclusively on one asset class. However, today we propose discussing equities. Why? Because when you consider the news headlines, and then consider equity markets, we appear to be living in a parallel universe.
The news feed from the coronavirus is all consuming, and rightly so. A disease that was widely touted, just a couple of months ago, as ‘similar’ to influenza has infected millions and killed hundreds of thousands of people.
Two major disasters have crossed paths and it seems that the only good news we read about these days relates to how the coronavirus pandemic is slowing down climate change. Otherwise the press is full of heart-breaking stories of loss, peppered with acts of kindness and a sense of us trying to pull together. No one can tell us with absolute certainty what the future looks like, or when this will end. It can feel like we are staring into the deep unknown.
One of the first lessons you are taught when studying anything investment related is the role diversification plays. For my investment exams, I was taught a diversified portfolio consisted of around 20 stocks ‒ a mere nod to today’s view. Instead, your portfolios – if you are a client of Nedbank Private Wealth that is – are invested across thousands of companies.
As we witnessed in our latest webinar (click here for the Q&A), investors are struggling to understand everything given the tsunami of news. Markets have begun to claw back losses in some areas, but there may well be more bad news ahead, before we see a sustained trend in positive headlines. So what’s next?
“He allowed himself to be swayed by his conviction that human beings are not born once and for all on the day their mothers give birth to them, but that life obliges them over and over again to give birth to themselves.” ― Gabriel García Márquez, Love in the Time of Cholera
As children, most of us were excited to visit a sweet shop – I definitely was. Dazzled by the bright display of shelf upon shelf of glass jars, there were sweets of every possible shape, colour and taste – all covered in sugar. Some coins lay in my hand, but which sweets would I choose?
We see high levels of cash in bank balances far too often. We understand the reasons people give when asked why.
We are one of only a handful of wealth managers who use currency management as part of our investment approach. In this short 45-second video, we explain why.
International Women’s Day was on Sunday 8 March, a day that since 1910 has focused attention on women’s rights. The day – and the invitation to speak on the topic at the Institute of Directors on 6 March – prompted me to think through how much has changed for women in the last 110 years. While there are still challenges ahead, this is pivotal time for women.
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