As I am sure you are aware we’ve experienced a lot of share market volatility in recent weeks. In order to alleviate some of the stress caused by this uncertainty we have put together a summary to help clarify the recent declines in your account balance, provide some longer-term context and highlight our investment beliefs and outlook for your portfolio.
We appreciate it’s not easy to ignore what’s happening to your investments when there is negative news and markets are volatile, however, it is often during these times we deliver our best ‘value’ by sticking to our knitting.
What took place?
October was certainly a volatile month, and November has continued that trend. During October, share markets globally fell between 6% and 7% in total return terms. Australia had the worst monthly outcome since August 2015. If you measure the falls from highs this year to recent lows the retreat has been even bigger. The average decline for global shares has been around 10%. From its peak in late August, the S&PASX200 fell almost 11%. Emerging markets were hard hit, down around 20%, with China’s stock market slumping 30%.
Your portfolio has been affected by these declines, but not to the same magnitude. Whilst it is a silver lining, this is where the benefits of diversification come into play as can active fund managers.
What controls are in place to protect your account balance?
In all periods of volatility, markets act irrationally and the active managers in your portfolio (Antares, Bennelong, Capital Group, PIC Inflation Plus etc) are doing exactly what we expect of them, looking to take advantage and buy good investments at cheaper prices than they could prior to the volatility, which helps lay the foundations for long-term growth.
For a while our portfolios, and the investments within, have been ‘defensively’ positioned. Many of your investments have been holding more cash than normal and investing in alternative assets and strategies that provide returns that are not reliant on share markets. The PIC Inflation Plus Fund is a good example of this.
Our focus on managing risk and searching for ways to help reduce the impact of significant negative returns on our portfolios may not prevent negative returns in weak share market conditions but our caution should provide some insulation.
Where to from here?
While history has shown us the share market does bounce back, we often don’t know how long it will take. You may recall we experienced a significant bout of share market weakness in February this year, only to have the market exceed expectations over following months.
Long term context can also be helpful, the Australian share market (measured by the S&P/ASX200 Accumulation Index) returned 11.3% pa in the seven years to 30 September 2018 while the global share market return (measured by the MSCI All Countries World Index, hedged to Australian dollars) was 15.4% pa in the same period. This period included times of extreme market volatility. Notable headlines include the Greek debt crisis, Brexit Vote, Trump election etc.
There are several reasons to believe that there is a good chance that markets will be higher in two months, six months or 12 months. Two key take-outs are provided below:
- For major and sustained negative returns to persist, the US economy would have to enter recession and take the rest of the world with it. At the moment, key economic indicators suggest there is slim chance of that happening.
- Interest rates around the world remain low. Whilst the US has increased rates, they still have a long way to go before they would create long-term implications for holders of debt.
Investment markets rise most of the time, and they tend to fall or correct after periods of strong growth. Your portfolio has benefitted from growth over the long-term and we expect things will normalise with time. By selling your investments immediately after a significant fall you’re not only taking losses, you’re reducing your chances of making your money back when markets recover.
The reality of investing in share markets is that we need to accept some risk when seeking returns that will outpace inflation in the long run. We continue to believe in our philosophy, the underlying investment managers and their suitability for your investment objectives.
As your Advisers we are here to help educate you and alleviate any concerns you may be having regarding your portfolio. Don’t hesitate to call the office should you want to discuss things further.