Short Term Risks for Long Term Rewards

Global Stock markets have dipped significantly in the past few weeks as fears over global economies and falling inflation hit shares and drove up bond prices. Reports of the slowdown in growth in the US, disappointment over the health of the economy in Europe, concerns about a slowdown in Asia, as well as the threat of the Ebola virus and ongoing concerns in Ukraine and Syria are all hitting investor confidence driving down recent positive sentiment and improved outlook.

There is also political turmoil in the heart of Europe, as investors look ahead to the end of Quantitative Easing at the end of this month, and see very little evidence of a balancing factor to mitigate the end of monetary stimulus from central banks and falling prices.

Combined with these concerns about economic and political paralysis at the heart of Europe, Germany combats French and Italian demands to give the European Central Bank a free rein. This has raised the prospect that Europe’s economic growth could well be sub-par for years to come. A fact reinforced by the recent growth downgrades by the IMF and OECD of the European economy and more recently by the German finance ministry of the German economy, which is the anchor around which all of Europe has pivoted.

The effect of these issues have driven down global stock markets in the last few weeks and driven up the price of safe-haven sovereign debt, thus reducing the yields on UK gilts, German bunds and US Treasuries.

One of the main risks for investors is withdrawing from the markets at the wrong time. Time in the markets not timing the markets should continue to be a priority for investors. Furthermore, it is well worth remembering that our clients like many other investors have all diversified their investments amongst various asset classes broadly; Cash, Fixed Interest, Property & Equities, and whilst in the short term will see the value of their investment portfolios drop, this will not be to the same extent as the stock markets generally.

None of these events will surprise or shock investors who have set out a strategy of investing over the medium or longer term in order to deliver the objectives of their financial plan. Investors will be rewarded for maintaining the risk within their investments. They will see value in stock prices, particularly in stocks where businesses are in a position to get through this difficult period of the economy in good shape, and where they have rising cash-flows, earnings and dividends. Therefore there remains a significant upside on a three-to-five year view. Investors who do not currently need cash may wish to look at the longer term, and take advantage of these depressed prices, as we look to higher equity values in months and years to come.