I am writing this update to address what can only be referred to as the chaos we’re currently experiencing in equity markets. This article is longer than I first intended, but please read to the end.
Looking beyond the headlines for a second, a key narrative is that the U.S. needs interest rates to come down and for this to happen, they are forcing a stock market collapse, however, this is pushing bond prices up. Most of your portfolios hold anywhere between 15% – 40% of bonds (risk profile dependant) and so this portion is actually benefiting from the current situation. See below an index for the global bond market posting +3% gains in the last 3 months.
The equity markets hit hardest are the U.S. markets (S&P500 and Nasdaq) – these are the markets dominating headlines as they’ve dropped -15% and -19% respectively. The primary reason is that if the tariffs announced by the Trump administration last Thursday stay as they are for the long term, the economy set to be hit the hardest is actually the U.S. itself. Zooming out to the global stock market, the drop is not as substantial and even some of the defensive equity funds we hold, such as Fidelity Global Dividend, have been neutral over the last month – most portfolios have a further 10% allocation here:
I bring these two points to your attention to highlight that whilst there may be overwhelming losses in the stock market in general, and of course your portfolios will reflect this, they are still suitably diversified to:
a. Minimise downside as much as we sensibly can
b. Provide us with the necessary flexibility to rebalance/rotate into over-sold positions when we feel the timing is right
Looking ahead to today’s market movements, we’re likely going to see further -5% declines (or more) in U.S. equity markets due to a lack of positive news over the weekend.
This will bring U.S. markets down to c.30% losses – the same losses we saw when Covid-19 shut down the global economy overnight. This indicates the market is massively oversold and all rationale has gone out of the window.
However, when the President of the worlds largest economy is attempting to force irrational policy through, this is understandable.
But if there is one thing we can all agree on when it comes to Trump, it’s that his reputation is everything to him. Hence, in our opinion, there is very low probability of these Tariffs staying as they are. If a U-turn materialises, we will see the global stock market rally and rapidly erase much of these losses in a very short period of time.
1. Trump gets what he wants – better global trade (lower tariffs than when this madness started) and lower interest rates. Markets will rally due to more favourable economic prospects from global trade AND due to the return of ‘cheap money’. Lower rates will mean banks start lending again and liquidity floods the system pushing asset prices higher.
2. Trump doesn’t get what he wants – The tariffs stay as they are, we see mass global recession with the worlds largest economy (the U.S.) hit the hardest. As we have seen time and time again, a global recession will lead to quantitative easing, huge interest rates cuts and excessive amounts of liquidity flooding the system. In turn asset prices will rise (this is what fuelled the huge stock market rally in the midst of Covid).
Trump is playing ‘Chicken’ with the global economy – but provided we don’t sell our assets during this time we stand to be the primary beneficiaries of his game.
Scenario 1 will see a recovery in a matter of weeks. Scenario 2 will take a little bit longer, however, the key message is that the only thing standing between now and your portfolio retuning to new all-time highs is time.
With this being said, we maintain our view that this is a good opportunity to buy assets at discount. Today is not the day. However, possibly the end of this week, end of this month, end of this quarter, when we see stability return and a clear path ahead, we will look to rebalance your portfolios, bring them back to neutral and in doing so, increase holdings of the assets hit hardest (and provide greatest potential for upside).
For those of you contributing every month, your money is working 30%+ as hard for you as it was a month ago. This is great news.
For those of you sitting on excess cash looking for a good opportunity, this is it!
Please accept my apologies for such an ‘economic’ heavy email. As always, my intention is to keep you informed and updated with our view and the approach we are taking to ensure your money (and my money) is as safe as it possibly can be whilst still sensibly looking to maximise upside.
If you would like to schedule a time to speak with me, please use the link below or alternatively, you can reply to this email or WhatsApp me.
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