When Will Markets Recover - Ipac Asset Management

When Will Markets Recover?
 
Last year was an exceptionally bad one for investors worldwide with heavy falls in most markets turning into a virtual panic in October. All long-term investors saw the value of their portfolios fall sharply, and it is only natural to be concerned at the situation.
What’s important now is not to turn current fears and concerns into permanent losses that cannot be recovered. All our experience and research suggests that markets have significant recovery potential, and our portfolios hold quality investments that we expect to do well when recovery comes. We can’t predict exactly when this will be (and we don’t know anyone who can). However more than 100 years of market history suggests it will happen.

Why are we confident in recovery?
With dramatic daily newspaper headlines, it’s easy to forget that markets have always recovered from previous downturns to reach new highs. We have seen crisis events before and quality, value, diversity and time, have always participated in past recoveries. A goal portfolio is based on the four pillars of the bond market crash of 1994, the Asian financial crisis, the technology stock bubble of the early 2000s and numerous other major corrections. And will recover.
While this downturn has been exceptionally severe, the benefit of a diversified approach is that the permanent loss is reduced. We expect the vast majority of price declines in portfolios to eventually recover.
For example, the portfolios are holding financial stocks that will benefit now from having fewer competitors. Most companies outside the financial sector – the bulk of our share holdings – entered the crunch period in healthy positions, and should also come out strongly.
In fixed interest markets, the portfolios hold high-quality securities that will benefit from a lift in the gloom. Government intervention is likely to put a floor under the price of many of these securities, providing a catalyst for recovery.

What are astute investors doing?
There are few ‘tricks’ to successful investing. Astute investors are holding good quality investments that are now trading at fire-sale prices, and giving markets time to recover.
The basics of good investment haven’t changed. In the short-term sentiment drives markets. In the long-term, the key factor is company earnings.
While economies have their difficult periods, as we are seeing now, populations rise, economies grow and many companies increase their earnings. The financial crisis doesn’t change this basic relationship. 
Governments and central banks across the globe have shown their determination to limit the economic fallout and stabilise markets. However, we can expect more ups and downs.

Wouldn’t cash be a better option right now?
A temptation in such volatile markets might be to end the emotional rollercoaster by switching all investments to cash. However, short-term relief may come at a high price later. By settling for a very low return, investors lock in a loss that is largely still on paper. As a result, they may not be able to achieve their long-term objectives.
Even when shares fall, many companies still pay dividends. And these dividends are often greater than the rate many investors could earn from an investment in cash. So unless cash is needed in the short-term, holding on to quality shares may well provide a better income return – plus the potential for a recovery in share prices.

What scenarios do we see from here?
Two possible scenarios for the next three years are a protracted global recession with very low returns (from diversified portfolios and cash), or a gradual return of confidence and recovery.
We judge the latter is most likely. Given that current share prices are well below average, this could mean above-average returns for quite some time for investors who stay the course.
Also remember that while economic news may continue to be bleak for some time, markets look forward and typically start to recover in advance of the economy. So the newspaper headlines can be dire, even while markets are rising.
Volatile times like these are often when we make decisions that can have a profound impact on our long-term financial position. We encourage you not to do this without seeking proper counsel. Please talk to your financial adviser who will offer advice to guide you through these testing times.

The economic and market commentaries in this document are provided by and are the views of ipac asset management limited ABN 22 003 257 225 AFS Licence No. 234655.  Neither the Operator, NMMT Limited ABN 42 058 835 573 AFS License No. 234653, nor the Trustee, N.M. Superannuation Propriety Limited ABN 31 008 428 322 AFS Licence No. 234654 necessarily endorse the views expressed in this publication nor express any view about the accuracy or completeness of the information and no liability is accepted for any errors it may contain.