Six Park’s Investment Advisory Committee (IAC) plays a pivotal role in assessing market conditions and reviewing our portfolios regularly. Our IAC met this week and discussed the volatility currently impacting markets.
After careful consideration, the IAC does not suggest any changes to Six Park’s investment parameters.
Brian Watson AO, co-founder of Six Park and Chair of the Investment Advisory Committee (IAC), shares some of the IAC’s views on current market conditions.
‘Declines in valuations such as we are seeing at the moment can be upsetting for investors, particularly those who have not been through a number of market cycles, or global economic and political upheavals. We have seen a few notable events recently, including a global pandemic, war in Europe and a Trump Presidency in the US, all of which have tested the nerves of even the most experienced investors.
The current market disruption has been influenced by all these events, but it is foremost a reaction to a bout of inflation affecting most economies, and the inevitable reaction by Central Banks to increase interest rates to try to slow inflation.
Market pundits are all trying to guess what the trajectory of inflation will be over the next year or two, and what interest rate rises Central Banks will impose as a result.
There is no consensus, because there are many unknowns:
- how long will the war in Ukraine persist, and the associated spike in energy and other commodity prices?
- when will the current supply chain challenges ease around the world?
- will China open up again, or will Covid continue to cause uncertainty there and elsewhere around the world?
- how skilfully will Central Banks balance slowing the rate of inflation without overly slowing economic growth?
A growing number of economists are predicting a recession in the US and in other Western economies within the next one to two years, as interest rate rises are seen as increasingly inevitable.
The IAC are also tending toward that view – but it is worth pointing out that not all recessions are equal.
Whether the world will move into a deep recession, a “technical recession” with a few calendar quarters of mild contraction, or something in between, depends on the outcome of the issues mentioned above, and the reaction of the Central Banks.
A number of factors appear to mitigate against the “worst case” outcomes.
- Corporate balance sheets in the largest economies seem sound, and solid earnings predictions remain intact, at least for the time being.
- Unemployment remains low in major economies, and households still have cash accumulated during the pandemic lockdowns.
- Rising interest rates will certainly cause some pain, but it does not feel like we are on the edge of a precipice.
As interest rates rise, what should not be overlooked is that this is in part a return to normality. The past few years have seen some of the lowest interest rates in recorded history due to Covid-induced market interventions by Central Banks. Rates were always going to rise again with the unwinding of these interventions. As a result, there was always going to be some volatility and market dislocation with that correction.
An Inflation Investment Strategy
On balance, the opinion of the IAC is to ride through this period of uncertainty and stay invested in a diversified portfolio that has the appropriate risk/return settings for your personal situation, unless you are absolutely required to consider otherwise.
The danger of trading in and out of the markets was highlighted during the pandemic- induced volatility of 2020, where those who exited their investments during the panic missed the stunning recovery of the markets in the following year.
The IAC sees no compelling case to adjust the Six Park portfolio asset allocations at this stage. We will continue to review Six Park’s portfolios, and we will keep you up to date if and when our views change.