With our home situated on a hillside beneath the flight path of Manchester air traffic, we are treated to the sight of a steady stream of planes circling the city, before dropping altitude on the approach to the airport. During the pandemic, this gave us a literal window into the health of the aviation industry.
For a time during the darkest days of Covid, the usual cavalcade of passenger planes disappeared from the skies almost entirely, an eerie reminder that the earth was largely standing still. In the months that followed however, it was extremely reassuring to the see the gradual return of blinking red-and-green lights making their way across the sky in the evenings. Sparsely at first, then with increasing frequency, it felt like a positive barometer for a country – and indeed a world – starting to return to normal, as air travel returned in earnest.
Aviation seems an appropriate metaphor for investment markets right now. After a bumpy ride and forced landing in 2020, it was mostly a serene glide through smooth air during 2021, propelled by the favourable tailwinds of easing lockdown measures and a global economic recovery. So far by comparison, 2022 has given us all a rough ride. It’s a timely reminder that whilst the world is finally back on a flightpath to recovery, we should still be prepared for pockets of turbulence when it comes to our investments.
Despite Covid fears receding, it’s fair to say that 2022 has been a pretty worrying year so far. Political tensions are running high. Russia has been massing it’s military on the border of neighbouring Ukraine, whilst China has been carrying out military operations and drills in Taiwanese airspace. Kim Jong-un meanwhile appears to be taking advantage of the West’s preoccupation with these larger concerns, carrying out numerous missile tests, much to the understandable alarm of nearby Japan and it’s allies.
Setting aside the more overt human implications of potential armed conflict (which are far beyond the scope of this blog), in the context of our investments, what does all of this mean? Well, potential military conflicts are usually bad news for investment markets. It is often cited that markets hate uncertainty and nothing brings uncertainty like political wrangling and the threat of military action between the world’s largest superpowers.
However, whilst an outbreak of actual military hostilities would no doubt have a major impact, when it comes to global economics, currently the pen is proving mightier than the sword. It may seem perverse, but for now it is actually US policy makers who appear to be holding the most sway over investment markets.
Indications are that after a period of unprecedented financial stimulus, the Fed is now entering a phase of fiscal tightening, as it seeks to get a grip on inflation. This likely means rising interest rates and less economic support measures. Markets – the US especially – have taken this with a distinct lack of decorum. Our investment partners Tatton have dubbed this, the ‘taper tantrum 2.0’, due it’s similarities with events seen in 2013. At that time the Fed announced it’s intentions to wind-down it’s quantitative easing program, as the world emerged from the banking crisis and economic conditions improved. Markets initially threw a tantrum and sold-off in response, but it wasn’t long before they returned to growth again once they’d gotten over their initial displeasure.
However, it is true that we are currently in uncharted waters (or should I say airspace?!). This is the first time governments have used fiscal tightening to specifically address inflation since the 1990s. Markets could therefore be forgiven for being somewhat jittery, though it is telling that whilst investment markets have taken a temporary knock, there are almost as many buyers as sellers. Whenever a sell-off occurs, it is often undisciplined private investors that lose themselves to panic, whilst cooler heads and institutional investors do what they do best; look past the noise and take advantage of a short-term drop in equity prices.
There is no telling how long this new stretch of turbulence will last and currently it’s resulting in portfolios giving back some of the handsome gains they made over the past 12 months. The extent of the retrace may result in the issue of 10% drop notifications, especially for those in punchier portfolios with higher exposure to shares. These notices are sent out in the event an investment portfolio posts losses in excess of 10% in a single quarter. The occasional sharp correction is a normal part of investing, as we can't have the ups without the downs, so this should be no great cause for concern. The chart below puts this into perspective, showing the impact this has had on the twelve month performance of three of our most popular portfolios:
For those of you who are fully invested, you’ll just need to fasten your seatbelts, sit tight and ride it out (though please feel free to use the toilets or smoke if you must). Our risk profiling process ensures that you’re already in the right portfolio for your timelines and goals, with appropriate volatility protection already in place if needed.
If you’re making regular savings to investments and pensions, you’re in luck. The things we want in our portfolios just got marked down in a January sale, so our regular contributions will now be snapping up extra cheap shares for as long as this discount lasts.
For those of you in a fortunate position to be able to top up your portfolios with lump sums meanwhile, this is a nice buying opportunity, that will help boost the long term performance of your investments.
Finally, to really put things in perspective, spare a thought for those bold souls investing in Bitcoin over more traditional assets. Their recent adventures in volatility make ours barely register on the scale. The chart below covers the performance of the physical Bitcoin index, which launched in February last year, to our portfolios over the same period.
Whilst there are plenty of people making (and losing) money on Bitcoin and other crypto-currencies, this wild volatility is one of the reasons it doesn't form part of our portfolios.
So on that Crypto-currency bombshell, I’ll close for now.
If you have any questions about this bulletin or anything else financial, please don’t hesitate to get in touch, and to our clients, we look forwards to seeing you for your next financial review.
Kind Regards
James Wetherall
