How you can avoid being MAULED by the BEAR MARKET
With China in crisis, Ukraine at war and interest rates up, stocks are plunging...
HAVe retail investors finally run out of luck after a fantastic time in recent years? For much of 2022, savers have watched nervously as ominous clouds gathered on the economic horizon. From high inflation to Ukraine, and now the return of economy-crushing lockdowns in China, it’s made for a bleak picture. As recession fears take hold on both sides of the Atlantic, world markets are heading south, with the MsCI World Index falling 3.5pc last week. It came as the U.s. Federal Reserve announced its largest rate rise in two decades, as central bankers struggle to tame runaway inflation.
In another calamitous day, the tech heavy Nasdaq fell 4.3pc on Monday, taking its losses this year to 26.59 pc — more than the Covid crash.
Unsurprisingly, this market meltdown has rocked investor confidence. According to the Investment Association, retail investors withdrew £7.1 billion from investment funds in the first quarter of 2022.
these dramatic outflows suggest that DIY investors are spooked. But what do the experts think?
BIG TECH LOSSES
the economic slowdown has already taken its toll on several market giants. While its founder has been making headlines with his twitter takeover, electric car maker tesla has plunged 34 pc since early April.
Meanwhile, Amazon became the latest U.s. company to report slowing sales, wiping more than $200billion off its valuation in 24 hours.
It was a rude awakening for a company that has long been considered a must-have share, and a staple of retail funds, says sophie LundYates, an analyst with investment service hargreaves Lansdown.
‘even with $116billion of quarterly sales, Amazon is suffering badly at the hands of economies of scale,’ she says. ‘the online retailer had to double its capacity to meet demand when the pandemic hit, and revenues aren’t keeping pace.’
the lukewarm numbers saw Jeff Bezos’s empire record its worst oneday performance since 2006. Its share price is down 36.16 pc this year. It comes just weeks after Netflix and Meta (Facebook) reported similarly poor sales. the tech staples are
down 71.02pc and 42.04pc since the beginning of the year.
As Jason hollands from tilney
Bestinvest points out, Wall street’s Nasdaq composite index (a popular measure of tech stocks) has fallen 26.59 pc in the same period.
the tech correction — which has entered ‘bear market’ territory — will have almost certainly made an impact on retail portfolios.
the last time this happened was in 2018, when a combination of trump’s trade wars and the threat of a political clampdown on big tech saw U.s. markets slump by 15 pc in six months. the sheer size of Apple, Amazon and Microsoft means they make up a large chunk of passive funds that track the U.s. market.
these large growth stocks have also been popular picks for active stock-pickers, who have used them to delight retail investors.
take Baillie Gifford’s scottish Mortgage Investment trust — a longstanding portfolio darling and a well-known tech investor.
After thriving throughout the pandemic, the trust has now fallen 38.80 pc this year.
Its share price has been dragged down by a slowdown for its biggest holding, including vaccine maker Moderna (down 42.23 pc) and tesla.
Other popular funds have tumbled, too, including Baillie Gifford U.s. Growth (down 44.98pc), Fundsmith equity (down 15.85 pc) and L&G Global tech (down 18.57 pc).
But the ripples from the juddering world economy have been felt beyond silicon Valley.
the MsCI World Index, a common measure of overall stock markets and a barometer of the world economy, is now down 17.5 pc this year.
In China and hong Kong, the return of Covid has dragged the CsI 300 and hang seng Index down
220.29 pc and 15.64 pc. Closer to home, the cost of living crunch has contributed to the UK’s FTSE 250 falling 18.39 pc since January. It comes as the Bank of england predicts that inflation will hit 10pc, with the potential for the UK to slip into recession. And there are signs that the gigantic u.s. economy may be heading for the same fate.
RECESSION WOES
INVESTORS have been particularly rattled by the return of one particular warning light with a track record for predicting recessions. Known as the yield curve, it concerns the rate of interest that big investors expect in order to purchase U.S government debt.
When the curve inverts — as it did last month — it suggests that capital markets anticipate strong risk on the short-term horizon. "The curve has inverted ahead of every recession in the u.s. over the past 50 years, with only one false positive,’ says Neil shearing, group chief economist with Capital
economics. But he suggests investors shouldn’t be so quick to assume the worst. At least, not yet.
he points out that household balance sheets remain strong in the u.s., suggesting consumer spending can weather the storm. ‘if recession does
materialise, it is more likely to do so in europe than in the u.s.,’ he says.
‘europe is a larger net importer of commodities, making it more exposed to the surge in prices — which then squeezes household incomes.’
if the picture wasn’t depressing enough, investment experts say it’s impossible to predict when the gloom will end.
‘While many economists believe inflation has either peaked or will do so soon, it could well linger at high levels for some time yet,’ says Jason hollands. The big question, he adds, is whether markets have correctly predicted the scale of monetary tightening, or whether banks will have to go even further. investors are unlikely to see any substantive recovery until there are indications that central banks are finally bringing inflation under control. ‘The easy money has been made, and we are now at an inflection point for investment strategies,’ says Graham harrison, managing director at investment consultants ArC. ‘The next decade will be significantly different for investors than it has been during the past three.’
BUYING UP
WiTh markets, nothing is certain — and there are signs that some investors are more optimistic. Last month we heard mega-billionaire
investor Warren Buffett had been on a spending spree, buying up shares he considers undervalued. his
investment house Berkshire hathaway spent $51billion buying shares last month, its highest level of net purchases since 2008.
Buffett is known for his maxim that investors should be fearful when others are greedy, and greedy when others are fearful. his company holds a $160billion stake in Apple, as well as large holdings in American express, Chevron and video game maker Activision.
‘if you are selective about the companies you choose to invest in, the valuations have hardly ever looked better,’ says stephen Yiu, manager of the Blue Whale Growth Fund.
Be careful of assuming that all prices always have to go back up.
The past six months has seen an implosion of many pandemic winners, including exercise firm
Peloton and video conference leader Zoom. Whether you’re an inflation pessimist or bullish like Buffett, be wary of rushing to make decisions.
SHUT OUT NOISE
iNVesTMeNT experts always caution against over-reacting to short-term noise, as it often causes pain. in turbulent times, share prices often move up and down from one week to the next, so investors who sell risk missing those gains.
Conduct a careful review of your portfolio to check it’s well balanced.
if you’ve suffered losses that outweigh the general market mood — i.e. more than 25pc — it could be a sign it lacks diversity.
Many investors may have ended up overexposed to tech. holding more than 3 pc of your portfolio in any one company is generally discouraged, although the size of giants such as Apple and Microsoft allows some leeway.
Turbulent times are a reminder of the need to have some money in
more defensive assets, such as precious metals, bonds and currencies. They tend to hold up in times of inflation. Gold is up 2 pc this year.
‘All investing involves taking on a degree of risk, and investors need to work out how much they are comfortable taking on to reach their goals,’ says Vanguard’s James Norton. ‘There is always uncertainty in markets. We recommend investors
build highly diversified global portfolios to reduce this risk to ensure the best chance of success.’
Vanguard’s Lifestrategy range provides a pre-diversified portfolio according to an investor’s particular risk level — with a divide between equities and defensive assets.
investors with active funds might consider having a percentage in a specialist defensive fund. The ruffer investment Company, which invests in index-linked bonds, commodities and gold, is a popular option.
Over five years, the fund has turned a £10,000 investment into £13,500. it has also performed strongly in the period in which markets have dipped: with a 4.8 pc return this year.
Jason hollands also recommends TB evenlode income and Artemis uK select as two cautious equity
funds to consider. Over five years, the funds have turned £10,000 into £13,100 and £12,800 respectively.
Patience might not provide instant comfort for investors, but it has a habit of paying off in the long run.
moneymail@dailymail.co.uk