Market Volatility

Dear visitor,

Recent events in the United States, Europe and Asia have resulted in heightened market volatility and it hasn’t been unusual to experience large sharemarket movements over very short periods of time. Simultaneously, we’ve seen large falls in the NZ$/US$ exchange rate (a positive for our investors with offshore assets) and also large falls in the price of crude oil and some other commodities. At the same time, prices of precious metals and bonds have increased reflecting investor perceptions of risk.

Considering the speed, volume and complexity of the information we are being instantaneously saturated with through the media, and the emotional impact this can have in terms of our financial decision-making, it’s quite normal to be thinking “what could be possibly next?” The importance of the answer to that question, very much depends on your investment objectives and your investment decision-making framework. At Spicers, we firmly believe that professional advice will ensure that your investment objectives and decisions are not compromised by the variability of day to day events.

One of the constants of investing is the element of “risk” without which “return” would only be an imaginary concept. In the current environment, even some of our perceived “safest” assets of property and bank deposits have come under increased scrutiny. With this degree of uncertainty, it’s understandable to contemplate that something has fundamentally changed within the machinery of the global economy, and within the financial markets which provide the lubrication for its efficient operation. In my view, the reactions we are seeing at present are simply a reflection of how equilibrium (or fundamental value) is re-established after a period of, in this case, credit driven excesses. In times of economic re-calibration such as now, financial markets often “under-shoot” and “over-shoot” – sometimes by considerable margins – before equilibrium is re-established. This has happened in the past and I confidently surmise will continue to be the case in the future in response to currently unknown events.

Regardless of the current environment, the economic foundations upon which global financial markets are built will continue to fulfil their purpose: businesses will continue to generate profits, consumers will continue to buy and sell goods and services; and people like you and I will continue to seek advice concerning the sensible investment of our scarce capital, which will include both short-term and long-term objectives in accordance with our individual goals. The alternative scenario of the world entering into a period of “depression” similar to that which occurred last century, is not one that I subscribe to, nor I believe should you.

While our investment team and your adviser are acutely aware of the factors driving financial markets currently, and your adviser is able to update you at any time, they are equally aware of the importance of perspective when it comes to your investment portfolio. When we look at financial market data from over the last 25 years, we can see that after a period of turbulence, the markets consistently return to a fundamental state. We believe market volatility is absolutely normal – while the market movements currently being experienced are generated from a unique set of events, the primary emotional factors of fear and greed are as common to today’s situation, as they have been in the past.

At Spicers, we continue to manage investment risk in your portfolio by spreading client money across a wide range of diversified international and domestic securities which we believe will minimise risk during periods of volatility while generating longer term growth and income. We back this up with strong investment governance processes so you can be confident that your investments are being prudently managed. Our investment team have acted in anticipation of the current market conditions by increasing their emphasis on investing in companies with “defensive” characteristics (i.e. companies whose sales and earnings remain relatively stable in periods of slower economic growth) and strong balance sheets.

Locally, our sharemarket investments have been defensively positioned for some time, with a focus on exporters and away from companies with “cyclical” characteristics (i.e. companies whose shares tend to fall rapidly when economic growth is slowing.) More detail on these strategies is contained in your quarterly investment report. In summary, at Spicers, while we believe that risk is part and parcel of successful investing, we are similarly firm in our view that speculation on tomorrow's market price is not.

Together with the professional advice of your Spicers adviser, you can have the best opportunity of achieving your individual objectives, despite short-term market volatility.

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