27 June 2022

Market turmoil - Martin Hawes

Martin Hawes looks at some of the factors frightening the markets at the moment and offers some light at the end of the tunnel.


There’s a lot going on at the moment. Markets have been in turmoil, predictions for economies look dire, and following COVID-19, there seems little chance of returning to business as usual anytime soon. Investors are forgiven for the fear they might be feeling.


In fact, right now, fear is the wrong emotion – these are excellent times for investors who have some cash, and a great opportunity, whether investing yourself or through managed funds. There is an old investment saying: buy in gloom, sell in boom. Now seems a gloomy enough time to be thinking about taking the plunge.


This is the fifth big slump that I have lived and invested through. The first one (in 1987) was the worst and caused me the most grief. Since then, I have become more and more relaxed during market turmoil; experience now tells me that falling markets represent opportunities to buy cheaply.


In the lead-up to Christmas, there are few bargains. But instead, this market is like the Boxing Day sales – that is, the time to buy cheaply.


And yet, everywhere I go, I find people who believe there is too much risk and that this is not a good time to invest. These people hoard their cash in the bank while they wait for “better” times. Of course, the problem with this waiting strategy is that when risk abates, markets will move very quickly, leaving those waiting stranded.

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Buying in gloom is the right thing to do, but it requires courage to buy in spite of all the negative noise. Investors are fearful at these times, and in a bid to ally those fears, it is worth considering what is driving the markets. There are three relatively short-term issues frightening the markets, and two longer-term worries. The three shorter-term worries are:


1. Inflation and the way interest rates are expected to rise to tame inflation. This is probably the share markets’ greatest worry at the moment and may take a few months to resolve. In particular, the market needs to have a bit more certainty on the level at which interest rates will settle, and the speed with which they will get there.


2. War in Ukraine. Markets are less concerned by this, provided the war does not escalate or spread. A truce or cessation would be good for markets, but it is not a prerequisite for the return of market rises.


3. Pandemic. There are still areas of the world (especially in China) that have tough COVID-19 restrictions, which certainly hold back economic recovery. Lockdowns, quarantines and mass testing have affected supply chains and consumption. A lifting of these kinds of restrictions would be helpful for markets.

As well as these short-term factors, there are two long-term things that may, in time, cause market volatility. These are:


1. Climate change and the costs associated with it. Although the steps taken to mitigate climate change will provide winners and losers, the uncertainty associated with it will likely provide its own volatility.


2. China rising. China’s rise seems unlikely to intensify greatly soon, but there does seem to be an inevitability about more conflict eventually (verbal conflict at least).


Of course, the world is not restricted to only negative market influencers. There are some very positive things for share markets that will feed the rebound when it comes:


1. Very high savings rates – there is a great deal of cash from households and corporates available to come back into equity markets when the time is right.


2. Full employment – those who have lost their job have plenty of options for a new one, and unemployment seems unlikely to rise a lot in the near future.


3. There is no standout investment type at the moment – all investments are performing poorly, and there is nothing that is attractive. When risk abates, a lot of money will go into share markets.


4. Business profits are holding up (so far, at least). This may change, but at the current levels of corporate profits, shares do not look very expensive.


5. There is still a great deal of invention and innovation – in technology especially, there are plenty of opportunities.

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So, the question on everyone’s lips is how long this might go on for. Of course, no one has perfect prescience, and so we do not really know the answer to this. However, given the very positive things lined up against the worries, I think that markets are likely to recover within a year or two, and quite possibly sooner. I do not think this is a major inflection point with the world going into some kind of downward spiral that could last for decades.


Given this, the current slump should be seen as an opportunity. I think the coming months should prove to be an excellent time to invest; you cannot pin an exact date on it, but with shares at current levels, I think those who invest during this slump will look back and be glad that they did.

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Written by:

Martin Hawes

Martin Hawes is not a Financial Adviser or a Financial Advice Provider, and the views in this article are not intended to be financial advice. The views and opinions are general in nature, and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. Martin Hawes is a director and shareholder in Lifetime Income.

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