Investors urged to avoid ‘doomsday prepper’ mindset
The media is brimming with apocalyptic stories about the volatility of global financial markets. But I am less pessimistic and, as such, would advise against a ‘doomsday prepper’ mindset, even though it’s right to be aware of the increasing market instability and risks. The Reuters news agency, amongst others, are quoting my views on this.
As reported this week in The Wall Street Journal, The Telegraph and City AM, amongst a whole host of others, the global economic slowdown is, seemingly, at the forefront of investor confusion and anguish.
So as share and oil prices fall across the globe against a backdrop of worldwide economic concern, what is causing this slowdown?
The devaluation of China’s currency; the boom and bust of the stock market; and slower GDP growth have all contributed to the slowdown, coupled with weaker commodity prices elsewhere which has been causing trouble for commodity-exporting emerging markets, and the increased expectation of interest rate hikes in the UK and U.S. adding to investor uncertainty, particularly considering high valuations on several major stock and bond markets.
It comes as little surprise that investors are treading carefully and stock markets are dropping in response.
So, with this volatility, I believe, is set to remain for at least the end of the year, at that time we will be able to see the suggested risk of a China economic ‘hard-landing’ much clearer, and the extent to which capital markets will be in a position to absorb increased U.S. interest rates.
However for the majority of long-term investors, these fears of a financial apocalypse are somewhat overdone. They should focus on ensuring their portfolios are suitably diversified, both geographically and by asset class, which means maintaining exposure to equities. History has taught us that they easily outperform bonds and cash over long investment periods.
After all, one of the most common investment mistakes is failure to diversify a portfolio, and this is even more crucial during times of increasing market volatility.
However that aside, the situation in China could have a positive outcome for investors in 2016. Devaluation will make their exports cheaper, helping the fragile economy to recover.
On my recent visits to China, I’ve seen consumption in the big cities is still very buoyant, which is great news for global businesses wanting to take advantage of the situation.
Other reasons to be upbeat are that the Euro is undervalued, which will help to boost a Eurozone recovery; I think any possible rate increase in the U.S. will be later than expected and not as high as predicted; and with oil prices being low, this will contribute to more global growth.
However, until this positive news begins to confront the current market anxiety, I would advise investors to sit tight, ensuring their portfolios are well diversified.