Investing in a time of fear
Investor Insights - Monthly news for investment professionals February 2016

It would be an understatement to say that it has been a rocky start to 2016. World markets are in turmoil. Fear abounds. Here in Australia, the stock market has followed the US stock market in experiencing its worst ever start to the year.

So what are investors to do? Thankfully, market panic is not new. We’ve all been here before. In this edition of Investor Insights we consider some of the tried and tested methods that investors can use to build portfolios that perform in times of market uncertainty.

2016: A beginning to forget

Let us first quickly summarise what has been happening since 2016 began. Most analysts would start the discussion by focussing on China. Since 1 January, the benchmark Shanghai Composite Index has dropped by almost 20% from 3,300 to 2,700 (first chart below). This continued the sell-off that began in mid-2015, when Chinese investors clearly decided that the extraordinary bull market in the first half of the year had wildly overshot fair value (second chart below).

From a simple reading of the charts, one could conclude that the real problem for the Chinese bourse was the excessive run-up in the first half of 2015, not the sell-down since, which has so far simply taken back the gains. But emergency closures of the Chinese bourse and continued negative sentiment have had their effect. International investor sentiment has also turned. Famed international commentator and fund manager, Nouriel Roubini, said in Davos in late January that markets had swung from fawning adulation of the Chinese policy to near revulsion on scant knowledge and a string of misunderstandings.

It used to be said that when the American economy sneezed, the Australian economy caught a cold. That same dynamic now holds true of China and the world. In response to the ructions in China, both the US (first graph below) and the Australian (second graph below) stock markets have retreated significantly since the start of January.

All of this has contributed to the general atmosphere of fear and uncertainty about market prospects for 2016. “In a crowded hall, exit doors are small”. So wrote RBS credit chief, Andrew Roberts, in January. “Sell everything except for high-quality bonds.” He tipped stocks in Western countries to fall by 20%, emerging markets to crumble and oil to trade at historical lows.

The risks for investors

All of this adds up to a very difficult time for investors. It’s true that stock markets tend to bounce back from bear market slumps. But, as the charts below show, there is no universal law that this must occur in the useful lifetime of an investor. The first chart shows the US Dow Jones Industrial Average (DJIA) in the years leading up to and following the Great Depression. From its peak in 1929, the DJIA crashed on an extraordinary scale and then took about two and half decades to regain its losses. The second chart shows the benchmark Japanese Nikkei 225, which peaked at nearly 39,000 in December 1989, before commencing a crash from which it has never recovered. Twenty five years later, the Nikkei 225 still languishes just above 15,000, despite an ‘Abenomics’ led surge over the last couple of years.

It is a sobering thought that an experience of this sort (if not quite the same magnitude) is familiar to contemporary Australian investors. As the chart below shows, the ASX 200 remains well below its pre-GFC highs, despite the fact that we are almost a decade down the track. For most investors at or near retirement, this is an unacceptably long period to hold portfolio losses – particularly if share sales are required to fund living expenses.

Building a better portfolio

So how can a rational investor respond to the risk of market volatility? Our view is that there are three key principles to bear in mind in constructing an investment portfolio, all of which help protect against volatile markets.

First, Keep It Simple, Silly (KISS). You are far more likely to be burned by market gyrations if you have not properly understood the investments you have chosen. You should consider weighting your portfolio to straightforward investments where the risks can be known and understood.

Second, never leave all your eggs in the one basket (diversify). All investments have risks and no investment is free from volatility. By building a diversified portfolio, you can ensure that fluctuations in individual investments and markets will not have a disproportionately adverse effect on your portfolio. In particular, make sure that you have an appropriate exposure to fixed income investments. Fixed income investments are generally built around regular income returns, repayment of initial investment on maturity and a higher level of capital stability than equity-based investments.

Finally, remember that getting rich slowly never goes out of fashion. Don’t be greedy. Remember that the largest market gains generally occur not long before the crash. In these bipolar times of great market volatility, it pays to take a steady, measured approach to investment and let time and compounding interest work in your favour.

Market update and investor briefing

Invest 30 minutes of your time to hear from our quarterly market update and investor teleconference.

Our presentation will cover the domestic and international trends and our ‘headwinds and tailwinds’ analysis. We will also update you on the Australian property market and our Credit Fund performance in the last quarter.

Event Details

Date: Thursday, 25 February 2016



12:00pm - 12:30pm  (AEDT)
  SA 11:30am - 12:00am  (ACDT)
  QLD 11:00am - 11:30am  (AEST)
  NT 10:30am - 11:00am  (ACST)
  WA 9:00am - 9:30am  (AWST)


Connect through your computer or by telephone

Further details will be provided on registration.

Best regards,

Chris Andrews
Vice President,
Chief Investment Officer

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