May 24, 2022
For once, it’s not just us. Across the world, inflation is rampant, gas prices are rocketing, food prices are soaring and the cost of living is driving many further into debt. The war in Ukraine plus overzealous Chinese lockdowns have also not helped. Central banks expected inflation, but Ukraine and China exacerbated the situation, and now central banks are playing catch-up. There’s a whiff of panic in the air.
This hasn’t gone unnoticed by markets. Everything’s been smashed. Equities, bonds, tech, crypto, over-leveraged traders, Russia, China, NFTs, SPACs – everybody has been impacted.1 And there’s nowhere to hide.
Painful as it is, this is not unusual. This is what markets do sometimes, and ironically, it can be good for markets as it cleans out the system.
There’s good news and bad news. The good news is that no financial asset goes up or down forever. So, things will stabilise and eventually revert to fair value. The bad news is it may take a while. The two primary drivers of where we find ourselves are showing no signs of abating.
With no clear honourable exit for Vladimir Putin in Ukraine, this could grind on for a while. Things have not gone his way. He envisaged a quick victory, installing a Moscow-friendly regime. He knew there’d be sanctions, but he thought the end justified the means. He believed his people could cope with hard times; they certainly can’t really complain or threaten him electorally as they could in a Western democracy. A maximum of five years of hardship, and then the world would move on and focus on something else – or so he thought.
Instead, he got a spirited fightback from Ukrainian forces and a drawn-out campaign, while from a sanctions perspective, Russia is being removed from the planet piece by piece.
Meanwhile, China’s extreme overreaction to COVID and the resultant lockdowns are wreaking havoc on supply chains and growth across the planet. Fortunately, numbers are coming down, so lockdowns are being loosened. However, it is clear that over-vigilance seems to be Xi Jinping’s strategy going forward. He’s not backing down, and this approach will continue to constrain growth and drive inflation.
Understandably, these types of markets cause anxiety amongst investors, along with the feeling that they should be ‘doing something’.
It is here where a financial advisor can add great value, as when it comes to our own money, we all (myself included) get emotional about it.
With our own money, we are generally incapable of getting our risk profiles right. When markets are going up, we all want an aggressive portfolio, and right now, everyone wants to be a conservative investor.
Your financial advisor should have risk-profiled you correctly, depending on your circumstances, and would hopefully have invested you accordingly. That strategy is designed to see you through whatever conditions markets throw at you.
Your advisor should also stop you acting emotionally at times like these. When investment decisions are guided by fear or greed, mistakes are made. Most of the bad news is already in the price, and markets have already adjusted. Hang in there. Ride it out. You can try trading in and out, but very few get that strategy right sustainably, and your advisor certainly would not recommend it.
Good luck out there, and remember, this too shall pass.
1 These acronyms refer to non-fungable tokens (NFTs) and special purpose acquisition companies (SPACs).