A correction we have been anticipating
At times like this the media tend to get over-excited and it helps to add some perspective to the headlines. The list of potential causes for this week's moves is well-documented, but we believe the fundamental reason was that markets were vulnerable to a correction and that several factors contributed towards it. This is something we have been anticipating and have been writing about in our monthly commentaries for some time. We did not know when it would happen and, if we are honest, we cannot say how far markets may fall or over what timescale. Despite the more recent blip, however, we remain positive on the medium to long-term outlook.
Sharp falls are nothing new — and recoveries follow
Taking the FTSE All-Share index back to 2004, a period that obviously includes the financial crash of 2007/08, even that extreme event recovered within six years. The point worth making is that there were frequent corrections over those years, but over the long term investors made significant gains.
Market volatility is often talked about as something to fear, a punishment inflicted on investors for taking risk. We take a different view. We see volatility as presenting opportunities to invest at cheaper levels for the longer term. A correction is generally a healthy move to eliminate some of the froth, and we still feel that equities represent the best value asset class over the next two to three years.
Not all asset classes fell equally
Although the FTSE 100 fell by nearly 9% over the past month and Europe fell by 9.5%, they were not representative of all asset classes. Our portfolios contain a blend of fixed interest and property as well as absolute return funds and, of course, equities. Even within the equity component, our overweight investments in Asia and emerging markets held up well compared to both their comparable indices and other markets.
This is precisely the benefit of a diverse portfolio. The falls that made the front pages were concentrated in developed-market equities, while other parts of a well-constructed portfolio provided a degree of shelter. We are using these opportunities to increase the equity weighting in portfolios at what we consider more attractive levels.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Known risks, not new ones
There are genuine causes for concern, such as the failure of the European Union to implement policies to stimulate growth and whether this will spread globally. We have also yet to see how markets fare without the helping hand of the US Federal Reserve. But all these headlines fit neatly with the sell-off; very few of them were not already known by investors for some time.
We think that a correction is generally a healthy move to eliminate some of the froth. We still feel that equities represent the best value asset over the next two to three years and are using these opportunities to increase the equity weighting in portfolios at what we consider to be attractive levels.
We view volatility not as punishment for taking risk, but as an opportunity to invest at cheaper levels for the longer term.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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