Start Thinking Like a Professional Investor in Volatile Times

Published / Last Updated on 10/05/2022

Markets are ‘all over the place’ at present with key drivers being fears of recession, inflation, interest rates, China lockdowns, Russia/Ukraine, energy and climate change.

Brexit

We called a “Leave” vote and markets fell on that.  How did we do that?  We have clients all over the UK some areas were clearly in favour of leaving as they felt they hade received very little out of joining the EU.  We gave the example of Grimsby, which before EU membership had the largest fishing fleet in the world at nearly 500 vessels.  At the time of the vote, there were just 20 vessels registered there.  In the North, mining, ship building, steel have all suffered.  London and the South-East has benefitted from law, financial services and technology.  It is no surprise that the South-East voted to remain.  We knew the vote would be closer than polls were predicting.

Covid-19

When China extended is new year celebrations and put Wuhan into lockdown in January 2020, we started to do research on the SARs virus of 2002/2003.  At the time, markets fell by 30% and then recovered 9 months later.  We suggested that if ‘coronavirus’ as we called it at the time had similar impact, markets could fall 30% plus.  They did and then recovered with 9 months as the first vaccines started to be administered in November 2020.

Inflation

All through those dark ‘lockdown’ days, we said that you should prepare for inflation.  This is the only way governments will repay their huge covid-19 borrowing costs.  Like Thatcher and Reagan did in the 1980s, inflation was allowed to run over an 8-10 year period, devaluing debt by around 60% before government Gilt and Bond debt became due to be repaid some 10-20 years later.  This is exactly what is happening now.  We said hedge for inflation, buy index linked gilts and bonds, buy property we said, buy holiday lets we said, as people return to work to buy flats in town and city centres as peoples work patterns and places of work change.

Using experience of consumer attitudes and macro economics, we were confident in our professional judgement

Unforeseen Events

The problem with unforeseen events is exactly that, there were not predicted and are unexpected.  Some may argue that Russia’s annexation of Crimea in 2014 always meant that a further attack on Ukraine was likely.  That said, for most of us, this was unforeseen and as a result, both the world and markets have reacted in a confused way.  China has now caught up with the world on covid-29 spreading, as the west opens up, Chinese cities are closing down.  War costs, damage repairs, political manoeuvring, higher energy prices, even high inflation, interest rate increases, and commodities shortages are confusing markets and investors alike.  At the time of writing, some markets are down between 10% and 18% since the invasion.

When dealing with unforeseen events, we all suffer when markets fall, we suggest you try and think like a professional investor.  We use a thought process called Win, Lose, Change.  There will be winners, there will be losers and you change the losers.

Win

Lose

Change

Inflation and index linked gilts and bonds.

Cash and bank deposits.

Move some cash and deposits to inflation linked assets such as index linked gilts, bonds and property.

Interest rate increases.

Fixed rate bonds and a slowdown for index linked bonds.

Banks and deposit savers will do better.  Annuity rates will improve.

Property.

1st time buyers if property become too expensive.

Buy/hold property, inflation will drive property prices ever higher.

Commodity rich countries for bond investing.

Countries with low commodities and exports may struggle to meet their debt obligations.

Australia Canada, China, India, Brazil, Norway, New Zealand.

Commodity rich industries for equity investing.

Companies in countries with low commodities exports will struggle.

Emerging nations Brazil, India, China, New Zealand, Vietnam, South Korea.

Arms production.

Russia.

Major arms producers USA, UK, France, Germany, Italy and China.

Green infrastructure.

Russia (as EU weans off Russian oil/gas).

China, USA, Germany, UK, France, Japan, India, South Korea, Brazil.

Countries with large food/grain production.

Russia.

Switch to investments in Australia, Canada, China, India, Brazil, Africa.

Countries with huge oil/gas production reserves.

Russia.

Switch to green energy projects and countries with huge oil reserves e.g., Canada, USA, Venezuela, Middle East.

Commodities and minerals.

Recession in West – countries and companies reliant on service sectors and subscription based (consumers cut spending).

Look to commodities and minerals-based companies and countries as above and move away from those firms that did well during lock down e.g., TV subscriptions, online shopping, social media and remote communications.

Financial services technology.

High street banking and face to face service companies.

Crypto currency will become mainstream eventually.  Financial services technology will expand to make it easier for all to manage money, data, investments.

Construction firms.

 

Ukraine will need rebuilding and green infrastructure projects will also grow even quicker (see above) as well as the housing shortage will drive growth.

We look for investment funds that have exposure to winners, in any given unforeseen event, look at the losers and make changes.  Look for the medium and long term impact of the sectors that you invest in.

Hold Your Nerve – Keep Calm and Carry On

In volatile markets, you will see investment losses, but markets have always recovered and will do so again.

In the words of Warren Buffet “Be fearful when others are greedy and greedy when others are fearful.  Think like a professional investor.

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