Always stay invested? Perhaps for once timing the market may be possible
It is difficult to remember a time when the consensus for markets was so universally gloomy, with investment banks, asset managers and private investors alike overwhelmingly in agreement that the outlook for the global economy does not bode well for stock markets. Indeed with the simultaneous triple-threat of heightened inflation, tightening monetary policy and slowing economic growth, it is difficult to argue against this, particularly as at the time of writing equities seem to be once again rolling over following one of the more obvious bear-market rallies in recent history. July’s huge surge in stock prices always looked flaky given it was a house built on the sandy foundations of hope that The Federal Reserve would pause their tightening agenda at a time that inflation was still overshooting its official target by over 300%! The theory now is that if rate-rises don’t provide the coup-de-grace for equity markets in 2022, then a recession will, as central banks simply have to prioritise inflation until is properly under control again. Paradoxically, recession may be the one thing that ultimately can bring prices back down to more historical norms. Add to this backdrop the conflict in Ukraine and China’s Covid tribulations and it is difficult to be optimistic as an investor.
We are often asked by our clients what to do in such situations, and of course the received wisdom is to stay invested as it is notoriously difficult to ‘time’ the markets and holding cash in an investment portfolio for any length of time has been a losing strategy in recent decades, especially as rebounds have seemed to be so fast and furious (exhibit A: April 2020). Nevertheless, the feeling one gets from clients that as investment ‘professionals’ we should be able to do better is palpable, and of course every investment manager knows that the timing of a new purchase of a portfolio or security matters hugely in terms of performance, no matter the veracity of the rationale. It is possible to opportunistically hold more cash than usual, however, and this feels like a particularly prescient tactic in light of the current extreme negativity. With this, and our client’s in mind, we feel compelled to consider when a significant buying opportunity may arise, over and above a simple rebalancing or ‘buy the dips’ approach. Notwithstanding any short-term ‘bear rallies’, we think it likely that for the long-term investor a significant buying opportunity will show itself in the coming months due to a number of converging factors that suggest a turning point in the cycle. Firstly, much of the selling this year (though triggered by the Ukraine invasion and Fed policy) has been simply the frothy excesses of the post-pandemic rally being blown away, as evidenced by the retreat of many of the over-valued growth/tech companies that led the charge from spring 2020 to the start of 2022. While much of this excess, (in the form of prices, valuations and earnings expectations) has been removed already – a simple look at a global stocks chart suggests there is an approximate natural bottom at Autumn 2020 levels. In terms of Fed Monetary policy, rates are expected to peak in mid 2023 so we can expect markets to eventually absorb the shock of higher rates sometime before this, as bond yields start to settle.
Policy as we know is being determined by Inflation, and while we aware it has been consistently exceeding predictions, the likelihood is this too will peak in coming months as nations continue to establish new post-pandemic supply chains and adjust their energy supplies away from Russia, while extra US oil and gas will hit the market, thus relieving one of the main causes of high prices. Furthermore the coming reporting seasons for companies will be the first time that the effects of the Ukraine conflict/higher prices will properly be reflected in the earnings figures (in particular those of European corporates), and this could spark the re-rating needed to make stock prices look attractive. It is quite possible that all these negative fundamentals align at broadly the same time next year marking the end of the current cycle, and with the equity markets generally pricing such things in advance, we think there could well be a clearer than usual buy signal towards the end of the year or early next. Unfortunate and painful as recessions are, it is known that buying equities during these times can pay off in the long term. With this eventuality maybe a matter of months away, perhaps holding cash for a while longer is a better strategy than simply staying fully invested.
Jonathan Unwin
Deputy Head of Asset Management and Advisory at Banque Havilland S.A. – UK Branch
( source: Citywire )
