15 November 2018

Strike Two!

Markets suffered their second sharp fall of the year in October.


The previous market drop in February proved short-lived and by the summer Wall Street was breaking new highs. At the point of writing, there has been some recovery in prices since October, but sentiment is rattled and the worst hit areas (namely emerging markets and stocks viewed as high growth) remain particularly volatile.

Before getting too carried away here, it is worth putting October 2018 in context. Yes, it was an ugly month for investors, however markets had enjoyed an exceptional run since early 2016 – we may be almost 10% down on the month but the MSCI All World is still up 38% since January 2016 in sterling terms. To use a somewhat extreme example of a high growth stock that has been hit, Fevertree (the premium tonic maker) shares are down 27% since their peak in September this year, however the shares have still almost tripled in two years, even after this fall. You can’t help but feel that media headlines of market falls sometimes forget to look at the bigger picture.

So why did the market fall and what should we be doing about it? Take your pick as to why the market suddenly got nervous in October. The most commonly mentioned concerns are: 1. Slowing Chinese economy and wider emerging market pressures; 2. Trade wars; 3. Rising interest rates and the end of quantitative easing (QE); 4. Eurozone troubles, primarily focused on Italy; 5. Brexit negotiations. I will not go into detail on each of these (the FT and Economist do a much better job of that than me), but I will say that of these, it is rising interest rates and the end of QE that concerns me most. We are just coming out of the longest period of cheap money (low interest rates) and central bank stimulus in modern history and there is no precedent for what waits on the other side of this monetary experiment. Interest rates are the foundation of all asset prices and any unexpected moves here can reverberate across the world.

In terms of what this means for us as investors, I feel that 2018 has been a timely reminder of the need for disciplined and humble stock picking. By disciplined, I mean that we must always be rigorous in researching the companies we invest in and patient in not overpaying for shares. By humble, I mean that we are all human and it is a skill to admit when we are wrong early and to protect capital first and foremost. I believe that investors who stick to these principles through good times and bad stand the best chance of protecting their savings in difficult times and growing them when the sun shines.

Written by Fred Mahon.

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