Market fluctuations and slowed economic growth are set to continue, causing prolonged uncertainty and stress. How can investors avoid knee-jerk reactions? In this article, Rivkin’s Investment Director, Oliver Gordon looks at the key levers affecting markets and how to approach investing during this time.
A Volatile Landscape
It has been a turbulent time across financial markets, ever since the Covid-19 outbreak in early 2020. The political response was swift, with strict lockdowns across many countries, resulting in sharp equity market declines in February and March 2020, as both consumption and production dropped significantly.
Equity markets, both in Australia and the US experienced some of their steepest declines in history, falling between 35% and 40% over a six-week period. While markets more than recovered from these loses, volatility has again returned, with the war in Ukraine dominating headlines since February 2022.
As of the end of April, one of the main US indices – the S&P500 is 15% below the recent peak, while Australian equities managed to hold up considerably better.
An Outlook of Slowed Growth
More recently, we have seen an increase in inflationary pressures both in Australia and globally, partly a consequence of central banks’ quantitative easing to support their’ economies through Covid-19. The recent figures for March show that headline CPI in Australia is increasing at a rate of 5.1% per year, the highest in two decades. The outlook for inflation is noticeably worse in the US, with the latest CPI figures at 8.5% year on year.
One of the flow-on effects from higher inflation is typically higher interest rates. To highlight this point, the last time inflation in Australia was above 5% was in June 2001, at which time the RBA cash rate was 5.0%. While central banks have been slow to lift official cash rates this time around, bond yields have rallied sharply for the past six months, as the yield on the Australian 10-year note shows in the graph below.
Higher interest rates typically curb economic activity as the ability to borrow and service debt decreases. More so, higher interest rates reduce the current valuations of growth companies as future cash flows are discounted back to a present value at a higher rate.
While we are yet to see any major economy enter an official recession, economic growth is clearly slowing. In April, the International Monetary Fund (IMF) cut its 2022 global growth forecast for the second time this year, from 4.4% down to 3.6. More recently, GDP data for the US in the first quarter showed a contraction of 1.4% annualised, significantly below expectations, which was for a 1.0% rise.
The Benefit of Systematic Investing During Volatility
Investing is inherently uncertain, in that it involves making decisions based on information that is currently available, yet the quality of those decisions is often not known for some months down the track.
Like any decision-making during uncertainty, rational thinking can be compromised due to increased stress. One way to deal with this as it relates to financial markets is to have an investment plan in place, to help guide your investment decisions.
Take this one step further and we can formalize a set of rules into a model, a process called systematic investing. At Rivkin, this is the journey that we embarked upon several years ago, transitioning to a more systematic approach to investment.
Momentum as a concept shifts capital to sectors of the market that are out-performing in relative terms.
More so, Quality again uses a ranking process, but this time based on a company’s fundamentals as it relates to their earnings quality.
In the current climate, the discipline of maintaining a systematic approach can help investors to stay focused on a long-term strategy and avoid making dramatic and potentially detrimental changes in reaction to short-term market fluctuations.
The Event Strategy for Low Volatility Investing
As well as our systematic models, Rivkin continues to offer the ASX Events Strategy,
The genesis of our stock market advice can be found within the ASX Event strategy. One of our most popular strategies, ASX Events focuses primarily on takeover arbitrage opportunities, where we look to buy companies trading at a discount to a binding takeover offer.
The benefit of this approach is that it is largely market-neutral in nature, meaning that its success is not tied to the swings in the broader share market. For investors seeking lower volatility in their portfolios, the ASX Events Strategy is one to consider.
Looking Forward
The current economic and financial climate is posing its fair share of challenges, and there is little doubt that decision-making can be harder as a result.
In times such as these, following a model portfolio with a defined set of rules can greatly reduce the anxiety of investing. With a systematic approach, investors can find it easier to see a more comfortable path forward.
At Rivkin, we’re here to help. If you have questions about investing in the current climate, please contact our team.
1300 748 546
