As anticipated by Six Park’s Investment Advisory Committee, share markets remain highly volatile, with much of the recent movement downwards.
We understand this can be scary for investors, which is why our Investment Advisory Committee closely assesses such developments.
8 observations of current market conditions
- Both international and Australian share markets have dropped more than 10% from recent highs at times, entering “correction” territory. It’s important to note that market corrections (down 10% or more) occur about every two years and are a part of share market cycles.
- The key drivers of recent volatility are 1) concern about interest rates rising faster than expected soon, 2) the possibility of a recession due to the impact of such rising interest rates, 3) rapidly rising inflation, and 4) the unknown economic impact of the war in Ukraine.
- Whether inflation will be overly sustained or in “runaway” mode remains unclear. We expected elevated inflation numbers for a period, and it’s too soon to panic about long-term problems on this front.
- One reason interest rates are rising is that many developed economies are actually faring reasonably well in the face of the pandemic and geopolitical headwinds. To a large extent, interest rates had to eventually rise after a prolonged period at historically low levels. It remains unknown whether the pace and magnitude of the future increases will have a long-term detrimental impact on global economic growth.
- Our main concern is whether these headwinds will accelerate to push the global economy into a prolonged recessionary environment, but we are not there.
- If we were thinking about future portfolio changes, an up-weighting in fixed income may be one consideration as higher rates settle in.
- We have the utmost confidence in our Investment Advisory Committee to assess corrections and, if needed, adjust our portfolio construction. We typically do not “tinker” with investment parameters during phases of volatility for the reasons above, but if conditions warrant changes, we will make them for our clients.
- We believe that asset class diversification (owning not just shares, but also bonds, listed property, listed infrastructure, and cash) is an effective form of risk management. When share markets drop, our client portfolios tend not to drop as much given the allocation to other asset classes.
The value of staying the course
The Investment Advisory Committee’s view right now is that making any asset allocation changes to our portfolios would be premature.
As an example, the manner in which markets sold off sharply at the onset of COVID but then recovered historically fast, is a good lesson on the benefits of patience and sticking to one’s plan.
We always strive to provide a disciplined platform that allows investors to stay the course with their investment strategies and not be swayed by emotions and/or market sentiment.