This is most definitely a Mike Tyson kind of market – so says Mike Fox, head of sustainable investing at Royal London.
What does he mean?
Well, first, for the younger generation let me explain that “Iron Mike” was a famously brutal world heavyweight boxing champion.
In investment terms, Mr Fox is alluding to the balance between future aspirations and short-term panic.
“It isn’t the ability to identity long-term goals and the actions that deliver them that defines success or failure, most people can do that,” he notes. “It is the ability to enact them day-to-day when emotions and feelings are urging us to act differently. As Mike Tyson famously said, everyone had a plan to beat me until I punched them in the face.”
Right now, sustainable investors, those who make choices on the basis of their life values, around issues like climate change, equal rights, animal welfare, decarbonisation, health and much more besides, are taking a beating.
They were on a great run over the past two to three years but have suffered more than most in 2022.
Which reminds us that it is never one-way traffic … and this can be applied to any asset class.
For example, with inflation, interest rates, taxes, and the cost of living all rising, might we see a shock to property prices?
Nobody knows – at the end of the day, however much financial knowledge they possess, even the experts can only guess.
Mr Fox commented: “Under our rule of thumb, each year on average there will be a ten per cent fall in markets due to a headline grabbing but ultimately unimportant story, such as trade wars. Every five years there may be a 20 per cent fall in equities due to a recession. Finally, every 10 years there will be a 50 per cent fall in the value of equities due to a systematic issue, which leads to a fundamental repricing of shares. The last example was the financial crisis of 2007/8.
“The question on the downside is – what is the probability of this being a once in 10-year 50 per cent correction?
Particularly given the conflict in Ukraine.
He went on: “We can find highly experienced investors and economists who take both sides of this debate. Ed Yardeni, a US economist and market strategist, is of the optimistic view that a combination of central bank action, productivity improvements and time will bring inflation down without a hard recession or interest rate increases beyond current forecasts. If this is to be the case, equity markets have already adjusted and should make new highs next year.
“Anatole Kaletsky, of Gavekal Research, is of the view that the sources of inflation, energy and food, are beyond the control of central banks as they are a function of sanctions and war, and that
inflation will be higher for longer, forcing central banks to push interest rates even higher, undermining asset prices for some time to come.”
For individual investors, the stress factor is the elephant in the room.
Mr Fox went on: “Periods of share price falls and underperformance are emotive, often creating the fear of further losses. Under these circumstances time horizons contract, and the mentality of investing changes from what do I need to do to be successful in the long-term, to what do I have to do today to survive. No-one being chased by a bear is thinking how to save for their retirement; they are thinking how I get out of this alive!”
Short-term performance can be lucky (or not). However, as the saying goes, patience is generally a virtue.