Before leading a workshop at Money Marketing Interactive next month, Tavistock Wealth investment consultant Steven McGregor talks market cycles and preparing for a downturn.
What’s behind recent market volatility?
Market volatility has increased in recent months for varying reasons: faltering UK and European negotiations leading up to Brexit, US/China trade tensions, and changing language from the US Federal Reserve on the pace of US fiscal tightening, to name but a few. All of these factors affected market sentiment in 2018 and the early part of 2019, leading to a rise in volatility from historically benign levels in 2017.
Are recent market movements unique or unprecedented?
A return to more normal levels of volatility in 2018/19 from benign levels in 2017 isn’t unique. It is worth remembering though that financial markets move in cycles and we are approaching the end of this one. Nobody can predict when the next bear market will occur, however the current UK bull market (10 years) is already longer than the average length (6.3 years).
The next bear market will inevitably come and when it does it will typically bring with it heightened levels of market volatility, leading investors to experience capital losses if they are not careful. The average length of the bear market in the UK lasts for 2.4 years, with an average cumulative loss of -36per cent.
It is quite feasible that the next bear market could see equity and bond markets fall simultaneously. Historically when equities have fallen bonds have performed relatively well, however the bond bubble is currently bursting. This combined with current levels of interest rates leaves us in a unique situation.
Source of statistics: Tavistock Wealth
Is there any hope central banks or governments can reverse the current bear market?
Crucially, this time around, we are facing a unique set of circumstances which may make it harder for investors to navigate. Historically, when the bear market arrives, central banks have had levers they can pull to stimulate the economy, such as cutting interest rates.
However, given the current (record low) levels they will have less ammunition in this regard. Quantitative Easing (QE) has been another method of stimulating the economy in the past, however this is coming to an end as we enter a period of Quantitative Tightening (QT). Quite simply, central banks have less ammunition today.
How can advisers position their clients’ portfolios to avoid the worst of any downturn?
Advisers should look to position their clients’ portfolios to avoid this potentially devastating downturn sooner rather than later – but they don’t have to run to cash or expensive, risky bonds to do this. By investing in a protection portfolio that contractually guarantees 90 per cent of the highest ever portfolio value, clients can remain invested and be protected from the next bear market.
Crucially this enables investors to participate in any upside that the current market cycle has to offer. Should the bull run continue the upside potential will be slightly less than an ‘unprotected’ portfolio, but positive returns can still be made and whenever the bear market happens you will be in the right place.