Investment commentary March 2017

Lessons from the past year: Don’t adjust your long-term strategy because of an alarming headline

February was a good month for share markets. In Australia our index rose 2.3%, while US shares were up 4% and European shares nearly 3%. In fact, as we look back over the last 12 months we’ve actually experienced very strong returns across almost all growth assets, well in excess of long run averages. Investor sentiment is quite positive, and while there are understandable concerns about the potential for political risk to cause market volatility, the healthy valuations reflected in shares and credit markets indicate a degree of optimism about the future.

Investor sentiment is much more positive than 12 months ago

If we think back to this time last year though, things looked very different. China’s currency had unexpectedly depreciated and the share market fell sharply. This led to fears that the Chinese economy would have a hard landing. Investors globally were already a bit on edge since similar fears about China had triggered a selloff in markets just a few months earlier.

So the first few months of 2016 saw sharp falls in global equity and commodity markets, strong returns for safe havens like bonds, and a general sense of pessimism from investors. In fact, a senior manager for one of the big investment banks was quoted in the Australian Financial Review recommending clients to “sell everything except high quality bonds”.

So what can we learn from the past year?

At the time we suggested the economic fundamentals were actually not that bad, that perhaps the negative market sentiment had become a bit over-done and that investors should remain diversified and be on the lookout for attractive investment opportunities. Why we’re revisiting the past is not about who was right or wrong in the predictions. Rather, it’s to point out that market sentiment often moves to extremes.

Newspapers will always find someone to say that the good times will go on forever, or during volatile periods that a major market crash is just around the corner. As an investor though it’s important to try to look through all the noise and to focus on your long term strategy.

What does a long-term strategy really mean in practice?

If markets have been kind and you’re a bit ahead of where you expected to be, then perhaps a conversation with your adviser might reveal that you no longer need to take as much risk with your investments. On the other hand if markets have been volatile it may be tempting to reduce risk and go to cash, but this could mean locking in losses and reducing the likelihood that your savings will earn enough to support you through your retirement.

So think long term and don’t feel like you need to react to the day’s headlines, and if you’re in any doubt whether your portfolio is structured appropriately for you, speak to your financial planner.