In the face of soaring inflation, rising interest rates and disruption to global supply chains, it’s been a bumpy ride for investors so far this year. Here we give our views on some of the questions investors have about markets at the moment and explain why it’s important to maintain composure and look for opportunities.
Just as the global economic outlook was beginning to improve following the pandemic, things have taken a turn for the worse. From the Russian invasion of Ukraine to surging inflation and rising interest rates, stock markets have fallen after a stream of negative news.
Despite the gloomy economic outlook, history shows that over the long term markets more than recover. In the short term, markets move around a lot, so it’s important to stay invested for the long term so that you participate in any recovery.
We asked Omnis investments to answer your five most common questions...
1. Why is the FTSE 100 Index up and my portfolio down?
The UK’s FTSE 100, which comprises the largest 100 companies listed in the UK, has been one of the strongest performing indices across the world this year (figure 1). Soaring fossil fuel prices, pushed higher by Russia’s invasion of Ukraine, have helped the shares of the world’s biggest energy companies outperform every other sector since the start of the year. This has led to companies such as Shell and BP seeing a major jump in earnings.
The increase in wholesale energy prices has fed through to customers who have seen their energy bills rocket, increasing the revenue for utility companies and boosting their market value. Shares in defence groups have also risen following an increase in demand for equipment as a result of the war in Ukraine. Broadly speaking, only these three sectors have delivered positive returns within those top 100 companies in the UK.
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2. When will the market recover?
While we expect markets to recover over time, predicting how long it will take is not forecastable with any certainty. History shows us that often after bad years, you get positive years, so it’s important to stay invested to make sure you don’t miss out on the market turning around. For example, during the financial crisis in 2008 the S&P 500 (a proxy for the US stock market) dropped 37%, but the following year it was up 26%. Three years later the index had grown 48% and five years later it was up 126%.
Investment markets don’t just rise continuously, and it is normal to... [Read more]
3. Is this the end for bonds? They haven’t provided any cushion this year.
With rising inflation and interest rate hikes pushing bond prices lower it’s been a challenging year for investors. Bonds are generally viewed as being lower risk than stocks and can also help generate a regular source of income.
However, supply chain disruptions caused by the Ukraine crisis and Omicron lockdowns in China have fuelled inflation which in turn has had a negative impact on bonds. This is because if prices are rising, the real value of both the annual income from bonds and the repayment of capital when the bonds mature are falling. Central banks are also raising interest rates to curb inflation, which presents a challenge to bond prices.
Despite inflation hitting multi-decade highs and central banks hiking interest rates ... [Read more]
4. Is there anything to be optimistic about?
Whilst the outlook may look bleak, there are some things on the horizon that give us reason to be optimistic over the medium term:
1. As supply chain issues begin to unwind, inflationary pressures will moderate, which should in turn take the pressure off central banks to aggressively raise interest rates. This would benefit the bond market.
2. China has said that it will support its economy and its financial markets. Whilst we are yet to see this support in action, any measures that the government introduces to enhance economic growth will benefit economies throughout Asia and emerging markets and in turn world stock markets.
3. Sentiment among individual investors is at near all-time lows. This shows us that some of the difficult market conditions are behind us. Whilst we expect markets to remain somewhat volatile, we may be en route to a turning point, which we will likely see towards the end of 2022.
4. In poor economic conditions there are some types of companies, such as utilities, healthcare companies or producers of essential consumer goods, that can continue to deliver profits and positive returns for investors. For example, during the global financial crisis, even when the US stock market dropped over 50%, there were some companies who were able to deliver positive returns (figure 4). Omnis’ investment managers manage our funds actively, can seek out these types of companies and position your funds appropriately.
During the global financial crisis, the US stock market... [Read more]
5. Should I disinvest now and wait for markets to begin recovering?
It’s nearly impossible to time the market successfully, and it almost always pays to stay invested during periods of volatility. Having a diverse portfolio spread across a variety of markets, stocks, bonds and other assets can help soften the blow if one area suffers in uncertain times.
Although it may feel counterintuitive, it’s important to stay calm and ride the ups and downs of your portfolio without making short-term decisions that could significantly impact the investment outcomes you achieve in the long run. Volatility is inevitable when investing in markets and it’s helpful to know that the leading indices have generally delivered positive returns over the long term.
Missing out on recoveries can be costly... [Read more]
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As always, the best thing to do when you are feeling nervous about your portfolio is to stay calm and speak to Richard, James or Nathan who will be able to assess your portfolio against your long-term objectives.
Issued by Omnis Investments Limited. This update reflects the views of Omnis at the time of writing and is subject to change. The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given. Past performance should not be considered as a guide to future performance.