Is it 2020 too? Stay sober amid turbulent markets
Identifying long-term investment opportunities requires a dose of tranquility
2022 was supposed to be a big bounce-back recovery year for the global economy. It was 2022 after all, not “2020 too”, and the worst of the once-in-a-hundred-years “black swan” event was supposed to be in our collective rear-view mirror. Not quite, it turns out.
By the end of 2021, global financial markets were already dealing with rapidly rising inflation, led by commodity prices due to the reopening of the advanced economies, effectively the most vaccinated parts of the world, which in turn led to a surge in demand – READ: revenge spending.
This, however, chased a limited amount of goods as global supply chains were strangled by lockdowns, in particular those of China due to its zero-COVID policy.
Concerns over inflation bring into play a shift in central bank policies. The problem this time around is that US inflation wasn’t just rising; it was rocketing to 40-year highs, which meant that the US Fed had no choice but to signal a change, and possibly an abrupt one, in its ultra-accommodative monetary policy path.
This forced markets to recalibrate expectations, which complacently assumed historic low interest rates for longer, driving volatility in risk asset prices higher.
When Russia invaded Ukraine on the 24th of February, everything changed. The world was suddenly thrown into another unforeseeable global risk event. Overnight, uncertainties multiplied and turbulence in global financial markets shifted into overdrive.
Year-to-date, US equities are down 21%, with tech stocks leading the drop, while US bonds, particularly the benchmark 10-year US Treasury bonds, are down 7.2%. Closer to home, the peso has depreciated against the US dollar by 2.7% while the Philippine Stock Exchange index (PSEi), down 4.6%, seems directionless, as foreigners once again have steered clear. As a result, market liquidity has dried up.
With mounting risks and the broader global economic recovery facing significant headwinds, particularly from cripplingly high energy and food prices, markets have sold good assets together with not-as-good assets in a race to de-risk portfolios and head to safer ground.
Price dislocations, when the intrinsic value of an asset decouples from the price the asset is trading at, continue to happen.
Investors are right to feel jittery. No one likes standing on shaky ground, but as history has shown time and time again, for those with longer-term horizons, the best returns are realized by bargain-hunting when the market is in panic mode, when irrational price dislocations are at their highest. As Nathan Rothschild, an 18th-century financier, put it, “The time to buy is when there’s blood in the streets”, which he did after the Battle of Waterloo.
Successful investors, therefore, stay sober in times of market turbulence and uncertainty, keeping emotions in check. It is never an easy ask. It is challenging to understand the level of risk you are able to tolerate, and patiently scope for long-term investment opportunities by distinguishing between good resilient risk assets that have been oversold versus bad ones.
We must also recognize that not all crises are the same. This is not the déjà vu of the 2008 global financial crisis or much less the global health crisis of two years ago. It is very much 2022, not “2020 too”, and it is important to put in place the right investment strategies that fit the current risk environment.
RUBEN L. ZAMORA is the Head of Institutional Investors Coverage Division of Metrobank.