How investors can weather stormy markets
Equities are a long-term investment. Investment time horizons should be greater than five years; equity investors should always be prepared for volatility over short-term time horizons. Investors should aim to hold companies that are of high quality with strong market positions. We tend to hold few companies that are cyclically exposed. Historically, at times of significant market falls - for example, the dot.com collapse at the beginning of the millennium and the global financial crisis now over a decade ago, quality companies have tended to fare better than the rest of the stock market.
Investing in equities means ownership of portions of businesses. Our ethos is not one of a brief holding of a collection of tickers but of ownership of real businesses. While speculation may be successful from time to time, this does not play a role in our fundamental approach.
We are, of course, conscious of the short-term performance of our holdings. Paying too much attention to the scoreboard, however, is unhelpful, and we believe we are better served in focusing on our core competencies of stock analysis and selection. An understanding of the macro environment does provide us with an outlook for different sectors and geographies.
The yield curve has inverted in the US. Historically this has been one of a number of indicators of stock market peaks. A multitude of other factors continue to provide grounds for optimism, however:
* Employment has not peaked.
* We have yet to see exuberant levels of mergers and acquisitions.
* Earnings revisions have not been particularly negative.
* Inflation looks benign and market valuations do not look overly stretched.
There are, of course, many things to be worried about for the global economy. To name a few: the US-China trade spat, a prospective war over Kashmir, Brexit, the Hong Kong unrest, climate change, countries with unsustainable debt and a global economic slowdown. There is, however, always something to worry about. Given that equities have empirically provided superior economic returns over all long-run time periods, is it really now time to think that “this time it's different”?
Timing the market in the short term is difficult and has been shown to be significantly more difficult than weather forecasting. Regard people with suspicion who say that they can do it. That said, we do not see the current fall as the start of a horrendous bear market. A “buy on the dips” strategy would seem sensible in our view.
What if we are wrong?
Quality companies tend to fall less than the market in market downturns. Of course, investors cannot eat negative absolute returns, but positive relative returns ought to provide some comfort.
Equity investing has to be considered as being for the long term. An investment manager with strong equity experience will partner with clients to guide them through stormy markets by adopting a phased approach to allocating fresh funds to equities. This will ultimately help provide clients with regret minimisation.
James Cooke is the head of global equity research at Ashburton Investments.