David & Libby Riding market rollercoaster

With economies in upheaval, now is not the time to let emotions take over

THE shine is quickly being rubbed off our long-running share market rally.

Tech stocks are getting thumped, a trade war is brewing and globalisation is slashing prices. Traditional business models are being challenged, global interest rates are rising and consumers are scared of the uncertainty.

After one of the longest bull markets, investors are being jolted back to reality. We hate October, because it seems to be the most common month for share volatility. But just as a year has four seasons, investment markets operate in cycles as well. It’s all about perspective.

So what’s behind the sell-off that started all this? Investment markets hate surprises and they hate uncertainty. The problem is there are plenty of both.

TRUMP’S TRADE WAR

Economic history tells us protectionism is terrible for global economic growth. It stifles trade, it promotes inefficiencies and actually costs jobs rather than saves them.

Currently we have the two most powerful economies in the world, China and the US, in a tit-for-tat trade war and lifting tariffs against each other, with neither backing down.

In the past, with issues such as lifting steel tariffs, US president Trump has played to his electoral base with grand statements to protect jobs, and then quietly watered down the initiatives to something more sensible and workable later.

But with mid-term US elections due next month, he is holding firm on his rhetoric against China to attract votes. Hopefully, once the elections are over, he’ll return to a more rational stance. Remember, China is America’s banker. It holds more US Government bonds than any other country, so if they want to play tough it could be really ugly.

THE ERA OF CHEAP MONEY IS ENDING

Many investors have been seduced by access to credit at record low interest rates as countries have tried to recalibrate their economies in the aftermath of the Global Financial Crisis.

But as economies have recovered, interest rates are rising. The reason is that, if they stayed low, economies would overheat, inflation would rise substantially and force interest rates even higher.

It’s a real balancing act. Keep interest rates low enough for the economy to grow, but adjust to avoid overheating.

The US economy is strong, unemployment is low and inflation is starting to creep up. So they are lifting rates.

Other countries will follow, but at different times to match their individual cycles. Here in Australia, the Reserve Bank governor has said the next move in our interest rates will be up, but not until at least well into next year, at the earliest.

TECH STOCK SUCCESS ATTRACTS REGULATORS

The darlings of the markets, particularly in the US and, to a lesser extent in Australia, have been technology stocks. Corporate juggernauts like Facebook, Google and Amazon have been making fortunes for investors. For many, they’ve been operating in a regulatory environment which hasn’t understood the power of these tech beasts … until now.

Government inquiries on issues like tax, data security and abuse of market power are being staged around the world, which is putting a spotlight on whether these companies will face restrictions in the future.

Closer to home, the Federal Government is closely examining the amount of tax the multinationals pay and has announced a Senate Inquiry into online lenders. Investors in these stocks start to worry whether profitability can be maintained into the future.

DISRUPTION AND GLOBALISATION

Traditional business models and sectors are being challenged. Look at how retail department stores are under pressure from online shopping, or how car manufacturing has shifted offshore. Look at the plunging costs of everything from TVs to cars to international airline travel.

The world of business is changing dramatically and competition comes from all corners of the globe, rather than around the corner or across the country.

That intense global competition is creating fortunes for those adjusting to the changes but also ruining those that aren’t. For investors, the challenge is backing the new winners and dumping the laggards.

WHERE TO NOW?

For those who have been caught badly by the market slide, it’s important to revisit investing fundamentals. Remember, we faced a similar situation in February and the markets recovered.

In buoyant markets and bad, many investors lose their discipline and almost become emotionally attached to rising prices or anchored to entry prices when values fall. But no matter the state of the market, it’s important to stick to your individual strategy and to bank profits and cut losses. Unfortunately, as investors we find it incredibly easy to buy a stock but exceptionally difficult to sell it, whether that’s to make a profit or realise a loss.

Good investors take the emotion out of the process by setting rules. So if you’ve been burnt by this “unexpected” dip in asset values, use it as a reminder to revisit your investing strategy.

The best strategies are always to get good advice and keep yourself well informed, but there are benefits in developing a strict investment approach.

The key then is to follow the plan, however nervous or frightened you may be that the market could drop further.

The last thing you want to be doing right now is making rash decisions you’ll regret.

So check in with your adviser or broker and revisit your strategy so you can make those unbiased orders with a clear head.