23rd August 2013
Informed Choice IFA Martin Bamford looks into the current ‘unprecedented’ investment environment.
Despite being a relative youngster in financial services (although rapidly losing that description), I’m led to believe that the current economic and investment climate is pretty much unprecedented. The history books don’t make reference to times like this.
It was bad enough when the global central banks were merely holding interest rates to the floor and pumping billions of dollars into the global economy. Doing this without distorting investment markets was impossible. It pushed up equity markets and knocked down gilt yields, sending the capital value of both asset classes sky-rocketing.
But as night follows day, concerns about how all of this might unravel appeared to take a swipe at investor confidence. The mere mention by the US Federal Reserve that they might need to start thinking about maybe tapering their programme of QE was enough to prompt a sharp market correction. This was naturally followed by some rapid but subtle backpedalling and the temporary restoration of market confidence.
It did however create one of the most perverse paradoxes investors have seen since the onset of the global financial crisis. Good economic news, which is usually sufficient to boost stock market values, now prompts renewed fears of QE tapering. When clients ask, ‘why is the market falling?’, we can answer without a hint of irony, ‘because unemployment in the US is going down’. What a mad, mad, mixed up, crazy world in which we live.
I’m undecided whether or not the recent decision by new Bank of England governor Mark Carney to effectively guarantee low interest rates until unemployment drops to a certain level was a good move or not. Part of me thinks that the markets should be left to decide on the probability of QE tapering on their own, without such a clear guideline. The announcement might have turned a gradual descent into a sudden cliff edge.
Or perhaps the opposite has been achieved, with the knowledge that markets will remain artificially boosted until the notional 7% unemployment level is reached. Only time will tell whether this previously untested strategy will work out for both the economy and investors.
So how should investors behave during these exceptional times?
There is no sense in denying that we are currently in exceptional times. Correlation between the asset classes is a bit screwy, as is market reaction to good news.
Investors need to accept this weirdness and probably continue to behave as if everything is pretty much normal. Some of the traditional ideas about risk management using traditionally ‘safe’ investment assets including gilts needs rethinking, but investors should continue to take the long-view. Attempting to behave exceptionally with your investment portfolio in these exceptional times could work well or could go spectacularly wrong.