Investing when the market is volatile

Here’s why:

• Strong short-term economic growth in the US, combined with a tight labour market, encouraged the US Federal Reserve to normalise monetary policy by lifting interest rates and reducing the size of its balance sheet.
• The US dollar strengthened.
• Financial conditions tightened and the US Treasury yield curve flattened. Rate sensitive sectors such as real estate and automobiles slowed.
• Chinese economic growth weakened to multi-decade lows, weighed down by efforts to deleverage the economy and a deterioration in trade relations with the US.
• The European Central Bank ended its bond buying program, despite contracting output in Germany, Italy and France.
• Political risks were rife – Tariffs, Brexit, Saudi-US tensions, Russian and Iranian sanctions by the US, Italian fiscal concerns, US government shutdown and the toppling of Australian Prime Minister, Malcolm Turnbull.  
• Companies cited rising profit margin pressures due to higher costs (i.e. borrowing, wages and energy) and downgraded their future revenue expectations amid weakening demand.  

All things considered, it’s been a pretty volatile period for investors. Short-term gains may be harder to find when there’s so much political uncertainty. However, valuable investment opportunities do exist, and there are still assets out there worth considering.

Looking ahead to 2019

2019 is likely to be characterised by further financial market volatility. Investor concerns about slowing global growth have been stoked by a synchronised slowdown in global manufacturing activity and weak business and consumer surveys. Trade volumes have eased due to tariffs. Chinese and German factory output are contracting. And US economic growth is expected to slow as the Trump Administration’s fiscal stimulus fades. In response, global central banks have changed tack, switching from a monetary policy tightening bias to a neutral stance.  With policymakers now in ‘wait and see’ mode and US-China trade optimism growing following ongoing talks, sharemarkets have rallied in January and February. And investors have continued to seek safe haven government bonds and gold on growing deflation and global growth concerns.

Our view, however, is that global recession concerns in 2019 are overdone.

Here’s why:

• The Chinese authorities will lower their growth target, but will continue to pump liquidity into the financial sector to ease credit conditions.
• And monetary policy may be eased further in China, supported by a pro-active fiscal policy (i.e. tax cuts and infrastructure spending).
• US economic growth will potentially slow to a still-healthy 2.5 per cent with the strong labour market supportive of household consumption.
• The US central bank is unlikely to increase interest rates again this year and may end the run-off of its balance sheet, which has been tightening financial conditions.
• While US wages growth is the strongest in a decade, overall inflation remains benign, giving the policymakers room to manoeuvre.

Of course, the ‘wildcard’ is US-China trade negotiations. If anything, a US-China trade agreement, US government policy focused on infrastructure spending and a pause in interest rates, could elongate the market and business cycle in the US, though earnings growth would be single digit.

Here in Australia, NSW and Federal elections loom, bringing uncertainty to the business sector, housing and share markets with possible policy changes. The uncertain backdrop for consumers, given the property downturn is an additional risk. But Aussie shares could benefit from a still-low currency, a possible interest rate cut, a post-Royal Commission bank rebound, and a boost to commodities from Chinese stimulus.

What should investors look at in a volatile market?

One of the ways that investors can tackle all this market volatility is through asset allocation and portfolio rebalancing.

For example, if you are risk-averse or approaching retirement, you may consider a conservative asset allocation designed to produce income (traditionally, this would mean a portfolio heavily weighted towards bonds and cash, rather than shares).

Alternatively, if your goals are geared toward longer-term growth, and you’re comfortable taking on more risk, you may consider a portfolio that is more heavily weighted towards shares. Selecting shares from different styles and sectors is important, as smaller companies are considered more cyclical than blue chip companies.

Discovering growth opportunities

Until the end of this cycle, investors are likely to favour quality companies that can demonstrate true earnings growth in a persistently slow-growth and low yield environment. Some investors may prefer companies that represent ‘good’ value with valuations for growth shares considered to be rich, despite the correction last year.

If you’re looking for growth stocks, current volatility means that some companies are considered cheap or undervalued by the sharemarket. “Undervalued” means that the price per share is lower than what the estimated price should be (based on the company’s total worth).

On the CommSec website, you can search for companies that the experts believe are undervalued. Log in to your account and go to Quotes & Research > Tools > Recommendations. You can also use the CommSec Stock Screener to search for undervalued growth stocks. This is an ideal place to start your research if you’re looking for growth opportunities.

Keeping an eye on your portfolio

It’s generally a good idea to check your portfolio at least once a year to ensure that your asset allocation still aligns with your financial circumstances, investment goals and risk tolerance. You may want to consider rebalancing if your goals or financial circumstances have changed.

Understanding the current economic climate is another way to keep tabs on your portfolio. There might be specific triggers – like changes in government policy or geo-political uncertainty – that prompt you to reassess your portfolio. Knowing how you will respond in these situations, whether you adjust your portfolio allocation or sit tight, could help you reduce your risk over the long term.