A note from our Investment Committee: volatility in equity markets - MGD
22 August 2019

Stephen Furness

Director - Wealth

Large falls in equity markets in recent days have seen commentators focus on the increasing risks of a global recession. Our Investment Committee provides a brief update below.

 

What’s going on?

The US yield curve became inverted in recent days, which means that US 10-year interest rates are now lower than 2-year interest rates. This spooked market participants and commentators, culminating in a reasonably substantial fall in global equity markets. US Equities had their biggest loss this year, down 2.9%, whilst other markets were also affected, with European Equities falling 2.0% and UK equities dropping 1.4%. The Australian market finished down 2.8%.

Inversions in the US yield curve have had a varied history of forecasting recessions. The reason the market was particularly impacted by these moves is that an inversion between 2-year and 10-year interest rates seems to have had a stronger rate of forecasting success in the past, with all recessions in modern history being preceded by an inversion at these points.

Whilst markets are paying close attention to these recent events, views of the likelihood and timing of recession remain mixed. While a recession is certainly a risk, some market commentators have noted that the Global Financial Crisis and ensuing recession occurred approximately two years after the December 2005 yield curve inversion and others note that the US economy is currently growing above trend. Adding into the mix geopolitical concerns with the US-China trade war front and centre, a general slow-down in global growth and corresponding dovish responses from central banks (including reducing interest rates), we do expect to see a return of significant levels of volatility to markets after a significant period of historically benign behaviour.

 

Should I be doing something with my investments?

Investors with portfolios that are diversified within and across a spectrum of asset classes such as Property, Infrastructure and Alternatives, would be expected to reduce the impact of any falls in equity markets. Within equities, exposures are generally spread across a number of geographic regions, sectors, and other risk factors. Many portfolios have exposures to bonds and foreign currency, which are further tools for managing potential equity market falls.

Additionally, investors who have their portfolios sensibly structured around their financial goals and investment time frames should be well served during volatile times.

So, whilst markets in general are becoming more volatile and skittish, the combination of risk management within portfolios and professional advice should give our full service wealth advisory clients comfort to stick with their long-term plans. For those readers who do not have a wealth advisory relationship with MGD, we would welcome the opportunity to discuss and review your financial arrangements.

Disclaimer: This article is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for personal advice.