Investment markets have continued the volatility we saw at the end of January with some markets back to where they were five (5) months ago.
The popular press would have you believe it is all about President Trump and a potential trade war with China. Alternatively, it could be about Trump’s involvement with the Russians, an increase in tensions with Iran or a great headline about an exotic dancer.
Well at least we aren’t talking about Kim Jung-un, ‘Supreme Leader of North Korea’?
So I think we could agree – this isn’t helping – but is it the real cause?
When it comes to money, there is a strong argument that the ‘noise’ isn’t the problem. Presidents and governments come and go and they can have an impact but they are not the biggest elephant in the room.
Markets are driven, over any medium term, by fundamentals. Shares, just like properties, can become overpriced. Facebook is a huge stock – A market capitalisation of $463B US Dollars at Friday 23 March. Apparently no-one realised that Facebook was selling our data to marketing companies?
The negative press on Facebook has seen the stock ‘tanking’, earnings forecasts ‘slashed’, ‘billions lost’.
Some really good emotive terms and certainly good in a headline.
A quick bit of perspective. Facebook closed on Friday, 23 March, with a share price of $159.39USD.
- A month ago that price was $184.93USD – a loss of 16% in a month!
- A year ago that price was $140.32USD – a gain of 13.6% over 12 months
- 5 Years ago that price $27.39 – a 5 year compound return of 42.2%
This example is not to defend Facebook. This is simply trying to give you a better helicopter view of value and widening your time horizon.
We, at RFS, are not direct asset selectors, but we do choose our managers carefully and we make sure we understand their holdings.
Magellan Global Investors, one of our international panel of managers, have been strong advocates of technology companies in the US and that has benefited investors very handsomely over the last 24 months.
At a select briefing with them on the 8th of March we asked Chris Weldon, Portfolio manager and senior investment analyst of Global Equity Strategies, whether he was taking profits after what had been a very successful tactic.
Chris (while not being able to foresee the press on Facebook over the last two weeks) was in agreement that many technology stock prices had outrun their fundamental value though still had potential. To manage this, they had increased their cash holdings in the fund to 20% and had taken profits.
Facebook may be getting the press but the technology sector generally has weakened with big stocks like Apple, Microsoft and Alphabet (Google) all suffering share price reductions. This can also impact totally unrelated stocks purely on sentiment and creates a buying opportunity for those cash holdings.
As we mentioned in our February note, we manage conservatively at all times, not just when markets are behaving badly.
When market valuations become stretched, any adverse commentary can see sudden drops in prices.
Are we seeing the impact of US policy or stretched valuations? On balance we would say the stretched valuations are the real issue, not the ‘news’.
In 2017, markets demonstrated very low volatility. This is actually abnormal. We are now seeing volatility return to normal and that is where active managers can add real value.
To borrow from Aristotle’s (384 BC -322 BC) phrase “one swallow, does not make a Spring”, one volatile quarter does not make a correction.
Markets are never smooth, and we must position for both good and bad times. This means we will see negative quarters but we will also see a lot of positive ones and the combination is what provides your return over any reasonable investment period.
As always if you have any concerns, talk to us. It is your money and we want you to be comfortable with where it is invested.