It’s a volatile time for investors as stock markets continue their downward slide. With annual inflation topping 8% in Ireland, cash is a poor refuge, and it’s because of inflation that central banks are set on hiking base rates for the foreseeable future, further depressing investor sentiment, and fund prices.
There are few ports in this storm. In euro terms as of mid-June, year-to-date the Irish stock market was down 24%, the US by 12%, Europe by 14% and the world markets average down by 11%. Bucking the trend is the UK stock market, up 2% year to date, due to the FTSE’s large weighting of energy stocks.
At Bank of America, chief investment strategist Michael Hartnett reports that the S&P 500 is now officially in bear market, the 20th bear market of the past 140 years. In this period, according to Hartnett, the average peak to trough bear decline has been 37%, and the average duration is 41 weeks.
“History is no guide to future performance, but if it were today’s bear market would end on October 19 2022 with the S&P 500 at 3000,” says Hartnett. “On a more positive note, for the next bull market, the average duration is 64 months with 198% return.”
Bank of America’s recent European Fund Manager Survey found that a net 73% of investors believe that the global economy will weaken over the coming year, the highest proportion on record.
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Participants are even more gloomy on Europe, with a net 77% expecting growth to slow. Half the fund manager panel expect a recession in Europe over the next 12 months, with the main risks to markets identified as hawkish central banks (32%), global recession (25%) and inflation (22%). The consensus view among professional investors is that above-trend inflation and below-trend growth will continue well into 2023, even as inflation expectations fade.
Survey respondents view banks as the most undervalued sector in Europe, and the resources sectors, energy and mining, rank second and third respectively. Real estate is the most unloved sector, followed by personal care and construction.
With bonds as well as equities under the cosh, even managed funds have been hurting, with a sector average decline of 5.2% to the end of April, and cautiously managed funds suffering too, down 4.4% in the period. Investors tied up in funds have to grin and bear it, though not all funds are feeling the same pain. Funds that outperformed in 2021 and the years before due to over-weight positions in US tech stocks are falling hardest in the 2022 rout. Life companies permit fund switches, subject to conditions, and every fund investor should be consulting their broker or financial advisor on their options.
Just as this year’s market volatility was inevitable, so too is recovery, though nobody knows when. In a recent note to brokers, Zurich opined that with interest rates for savers at all-time record lows, there is increased demand for alternatives to the traditional savings account. However, current volatility across investment funds can stop investors from deciding about moving their money.
Buying into funds at the moment can be especially problematic for lump sum investors. The unit purchase price is cheaper than a year ago but there’s every prospect of cheaper units in a few months’ time. One solution, suggests Zurich, is drip-feeding investment over a period of time, a concept described as unit cost averaging. The company’s ‘autoinvest’ strategy for investment bonds also facilitates a phased lump sum investment into selected funds over a period of six or 12 months.
