June 22nd, 2022.
Pure Wealth Economic Outlook (June 2022)
Throughout 2022, we have all seen some significant global events that have impacted everyone, regardless of how close or far you sit from those situations. The war in Ukraine has sent a sense of shock around the world and the global response is leaving an economic footprint on pretty much every market. We thought it would be a good idea to reach out and provide some commentary for our clients.
We are feeling the impact of globalised interdependence in the price we pay for everyday products. Accessibility to goods and the redirection of some supply chains to reduce Russian dependence has been significant.
Russia is the world’s third biggest oil producer, the second natural gas producer and among the top 5 producers of steel and aluminium. It is also the largest wheat exporter in the world (almost 20% of global trade). Ukraine is a key producer of corn (6th largest), wheat (7th), sunflowers (1st), and is amongst the top ten producers for sugar beet, barley, soya and rapeseed.
These materials particularly impact certain sectors, including the car industry and energy. We have all seen the steep increase of prices at the petrol station, but these problems go much deeper than that. Car manufacturers in Europe are heavily reliant upon supplies of raw materials from Ukraine including metals, semiconductors, cobalt, lithium and magnesium. The semi-conductor shortage since Covid-19 in 2020 had already slowed down the supply of new vehicles (6 months waiting time is now considered a miracle!) – this has been compounded by further reduced supply from Ukraine. All Russian railway transportation has been banned throughout Europe, which again has impacted the supply chain and cost of importation.
These factors have compounded the rising inflation that was already happening before the Russian invasion of Ukraine. Largely due to a steep increase in consumer demand and low unemployment since Covid-19, recovery began within an already depleted supply chain. We are now on the brink of 10% plus inflation levels, which have not been seen for decades.
This directly impacts the global economy which has been moving through the cycle at break-neck speed in recent years. The pace is showing no sign of easing as investors start to worry that the recovery from the pandemic may soon be coming to an end.
The catalyst for the move to the next phase of the cycle is a classic one – rising interest rates in response to inflation. Through June, both the US and UK increased interest rates further: the US by 0.75% – the biggest for nearly 30 years; and the UK by 0.25% – it’s fifth interest hike in a row and the highest current rate we have seen for 13 years at 1.25%. Rising interest rates increase the cost of borrowing and impact the value in equities, which tends to reduce investor sentiment and share prices.
As a result, client portfolios are seeing higher levels of volatility than some new to investing will have experienced previously. For more seasoned investors, short term market corrections are nothing new. Volatility is an area we discuss with all clients from initial recommendation and throughout reviews. It is an expectation of any investment portfolio, but one that seldom resonates until you experience lower than expected returns, or indeed negative returns yourself.
This is not a time to panic though, every client portfolio is diversely invested utilising robust research, economic theory, and Adviser experience to help weather the storm. History has told us that investment performance will return through cycles. Where higher risk portfolios are likely to experience higher volatility and greater short-term downside, they also always recover quicker than lower risk portfolios. Lower risk portfolios will generally experience more muted downsides, but also slower recoveries. No investments are immune to volatility, so it should be expected and understood to better help accommodate the natural nervousness and anxiety that reduced returns can create.
Timing is essential, it is not possible to time the market and buy at its lowest point in order to sell at the highest. As such, it is a more prudent approach to assess the time you have to invest in the market and understand that you can ride out undesirable short-term performance. To paraphrase Warren Buffet, it is always a case of “time in the market” and not “timing of the market”.
In demonstrating this point, according to J.P. Morgan, an investor with $10,000 in the S&P 500 Index who stayed fully invested between Jan. 4 1999 and Dec. 31 2018, would have gained about $30,000. An investor who got out of the market and therefore missed 10 of the best days in the market each year would have under $15,000. A very skittish investor who missed 30 of the best days would have less than what they started with—$6,213 to be exact.
If investors sell when the market is down, and their fund value is less than originally invested (net of withdrawals), they will realise an actual loss as opposed to a fluctuating figure on paper, should they remain invested.
It can be challenging to watch market prices decline and not pull out. However, research shows that the average duration of a bear or declining market is about one year, compared with approximately four years for the average bull or growth market. The average decline of a bear market is 30%, while the average gain of a bull market is 116%.
The important thing to remember is that a bear market is temporary. The subsequent bull market erases its declines and can extend the gains of the previous bull market.
The big risk for investors is missing out on the major gains in the market to come. Whilst past performance is no guarantee of future success, history should reassure us of the most likely outcomes.
We want to reassure you that we are looking after your investments, and if you have any questions, please feel free to get in touch.
Sources
Kiplinger. “10 Things You Must Know About Bull Markets
LPL Research. “Six Things to Know About Bear Markets
J.P. Morgan. “Guide to Retirement
https://www.investopedia.com/articles/investing/021116/3-reasons-not-sell-after-market-downturn.asp