Today's subject matter expert
Talk of whether the global economy is heading for a recession or not continue to dominate financial markets, with fears only growing in recent weeks. Regardless of whether we enter recession, major economies, with the notable exception of China, will need to experience a period of below trend growth in order to bring inflation back to central bank targets. Until investors are confident that either a recession is averted and/or inflation is falling back to targets, high financial market volatility is likely to persist.
While it can be easy to be swept into short-termism, investors should turn down the noise, and retain focus on achieving their longer term objectives. After all, the biggest risk an investor faces is failing to meet its return objective. Strategic Asset Allocations (SAAs) are built on the assumption that markets will go through periods of both panic and euphoria, boom and bust. Nevertheless, investors should ensure that SAAs are appropriate for meeting their return objectives and are suitably diversified from an asset class, risk factor and liquidity perspective.
Portfolios should also be stress tested for a wide range of scenarios. Underlying investment managers should be assessed on a forward, not backward-looking basis. Where appropriate governance structures are in place, investors can enhance returns and manage risk over the medium term through a Dynamic Asset Allocation process. Other investors can benefit from a rules-based rebalancing process which ensures actual allocations do not stray too far from the SAA, taking the emotion out of what can be the most stressful periods in markets.
While it may yet take some time for current inflationary and recessionary fears to dissipate, investors may take solace in the fact that other investors are currently running their lowest allocation to stocks at any point over the last two decades. Moreover, the poor performance in almost all asset classes this year has improved expected returns. Cash in most currencies, government bonds and credit now provide a decent nominal yield, while stock valuations have cheapened significantly. In fact, the long term outlook is arguably the most attractive in over a decade, if not, since the Global Financial Crisis.