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How to react to the global market falls

Chris Ainscough, Portfolio Manager of the Charles Stanley Multi Asset Funds, comments on recent market moves and what to do when markets are falling.

by
Chris Ainscough

13.02.2018

Market falls never feel pleasant, but for those with long term investments horizons there is no need to panic. Fluctuations, sometimes significant ones, are to be expected during the course of investing; and for those requiring the assurance of no fall in capital the only asset class that can be considered is cash.  Within the Charles Stanley Multi Asset Fund range we focus on generating returns ahead of inflation and we must take risks to try and achieve this.

Rather than fearing volatility we see it as an opportunity: a chance to test our assumptions, to revisit assets that we had previously felt were overvalued, as well as reassess correlations between asset classes and within them. Moreover, we stick firmly to our approach: To continually study the returns we expect to be able to generate over the economic cycle whilst taking targeted amounts of risk for the five different portfolios.  

Our multi asset funds have not been immune to the recent volatility and we wouldn’t expect them to be, but we remain confident that for investors willing and able to be patient with their capital the funds should meet their objectives over the long term. 

What was behind the volatility?

Reasons for the this latest bout of volatility have been much discussed – for instance in this article by Garry White – but a brief summary is as follows:

The global economic environment has been improving while inflation and interest rates have remained low. Central Banks have kept their monetary policy accommodative which helps support global asset prices. This backdrop has allowed companies to grow and their valuations to rise, while market volatility has been around record low levels for a very long time.

The apparent trigger of this correction was, counterintuitively, particularly strong data from the United States. This lead to expectations of faster interest rate rises in the US which pushed bond yields up and prices down. Comparing companies’ future earnings expectations with higher rates of inflation and borrowing costs caused the selloff in shares. We suspect that the unwinding of derivatives contracts based on volatility staying low and the actions of computerised algorithmic trading served to exacerbate the price swings.

This correction is reminder that economies and markets can move in different directions, something that often gets forgotten. Strong economic data is not always positive for investments. It depends on the implications of that data and what has already been taken into consideration. Although a strong economy, supportive financial conditions and a gradual increase in interest rates back towards more “normal" levels would be seen by many as a favourable investment environment, it is evident from recent action in the markets that the journey towards less accommodative central bank policy and higher interest rates may well be a bumpy one. In the longer term, however, we remain confident that investors will be rewarded, most notably equity investors in terms of dividend income and capital appreciation.

The impact on Charles Stanley Multi Asset Funds

The chart below shows our five multi asset funds since launch in April last year, including the somewhat dramatic pull-back that we have seen over the last week. There is a temptation felt by many investors to watch prices on a daily basis, but when we think about our investment horizon of five years plus the daily moves are far less relevant.

That said, when we have cash to put to work we certainly think hard about which assets may be mispriced at the time. While these funds are relatively new, with less than a year of performance to show, the Asset Management team at Charles Stanley have a long track-record of managing global multi asset portfolios and navigating volatility. We aim to use these periods as opportunities to buy assets that we believe have fallen more than they deserve, perhaps because sentiment is excessively weak or they are thinly traded meaning price moves can be exaggerated.

Performance of Charles Stanley Multi Asset Funds from launch:

Past performance is not a guide to future returns; funds are less than a year old so longer term past performance data is not available.

Keeping a cool head

When the stock market is suddenly headline news, which it inevitably is during falls but rarely, it seems, during rises, taking a step back can be difficult. However, the right course of action is to decide whether anything has fundamentally changed in your investment rationale. Panic selling into falling markets can exacerbate losses because if you intend to reinvest you may compound the problem by missing a bounce back up. It is often wise to be a spectator rather than a participant in trading at times of high volatility.  

If something has fundamentally changed then portfolio positioning needs to be reassessed and changed accordingly. If not, then “riding out the storm” while keeping a close eye on events tends to be the best course of action.

Changes we have made

We have recently carried out our long term asset allocation review for the year and despite all the quite sizable market moves, we believe little has fundamentally changed. Global growth is improving with many economies strengthening in concert.  We can only speculate as to how far markets will fall in the short term, but we think it’s important to bear in mind that strong economic data is not usually a precursor of global market meltdowns.

We will all need to adjust to a rising interest rate environment whilst remembering that interest rates will likely only rise if economic growth is robust enough to withstand it and inflation is heading towards target levels. We therefore remain positive on shares and, in particular, to Emerging Markets in the Asia Pacific region. These are often the areas to be hit hardest when investors get spooked and are good value.

The only major change within the funds recently was to take some profits within some particularly strongly-performing growth-orientated holdings in Asia.  These were replaced these with exposure to ‘value’ stocks which have lagged behind. We also added exposure to Frontier Markets, the economies in the tier below Emerging Markets in terms of economic development, to add diversification – they tend to be less correlated to global equities.

Table: Latest asset allocation of Charles Stanley Multi Asset Funds

Source: Charles Stanley, correct as at 31/01/2018

Find out more about the Charles Stanley Multi Asset Fund range here.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplemental Information Document and/or Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

 

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