Volatility and nervousness are two terms that could be used to describe the state of the markets at the current juncture.
However, its useful to remember that volatility itself often creates opportunities that can be exploited going forward.
On 2nd November, the Bank of England (BoE) decided to maintain interest rates at 5.25%, following the lead set by the Federal Open Market Committee (FOMC) which also decided on 1st November to hold Federal Reserve interest rates steady at 5.25-5.50%. The European Central Bank (ECB) also decided on 26th October to keep its key interest rate at 4%. Central banks now appear to take a ‘wait and see’ approach to the aggressive rate-hiking policies implemented to fight soaring inflation to further gauge the impact of recent rate hikes on markets and consumers. The next round of decisions will take place on 13th December for the Fed, and 14th December for the ECB and the BoE.
It’s clear that the combined effects of inflation, cost of living and the highest Interest rates in more than a decade are severely affecting the global economy. As of writing (2nd November 2023) the FTSE has decreased by 0.37% since the beginning of the year with the DOW increasing for the same period by merely 0.38%.
Among the many factors challenging market confidence are the issues affecting major global financial institutions such as higher borrowing costs, which, in turn, impact the entire market. As a direct example, the FTSE fell almost 7% in the first three weeks of March, as investors panicked during the near collapse of Credit Suisse. The fall in confidence is attributable to the combined effects of mounting concerns surrounding the banking sector, the ongoing war in Ukraine creating Inflation and soaring energy costs which impact both industrial output and consumer confidence.
What does this mean for investors? One key thing to keep in mind is that, in any given environment, whether it be a bull market or a bear market, opportunities are always present themselves to take advantage of under a keen risk management policy within the portfolio.
Investment objectives are a key consideration when managing a portfolio. Shifting from a long-term investment attitude to a short-term stance in investment structure can aid in countering market volatility. At Redhat Capital, we focus on shorter durations within our portfolios to ensure we are not exposed to any long-term issues such as central bank policies, inflationary or recessionary pressures.
The ongoing market volatility and current conditions raises the question of potential recessionary pressures. Fundamentally, recession is defined as two successive quarters of negative growth. It’s important to note that, as of the time of writing, although the UK hasn’t technically entered a recession, the signs of a slowdown are becoming clearer from both the consumer side in the form of reduced spending and a slowdown in corporate profits led by inflation and higher interest rates.
It is quite possible that within the coming 13 to 14 months, we could see at least three quarters of negative growth based on the projections of the impact of higher interest rates as borrowing and spending are curtailed across the board. Employing a diversified strategy with actively managed investments during these periods can be a beneficial way to ensure your assets can not only survive these periods of volatility but that they also continue to grow and generate income.
