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Navigating market turbulence | The case for diversification and long-term investment strategies

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By Capital Partners Markets and Investments

It was a year of uncertainty and anticipation, of hopes for a return to a degree of normalcy following the onset of the COVID-19 pandemic in 2020. And it was a year that showed, again, the difficulty of making investment decisions based on predictions of where markets will go – as well as the enduring benefits of diversification and flexibility. Volatile markets always create a sense of anxiety. However, they are expected – although the timing is unknown – and should be factored into any investment plan.

In many ways, it was a tale of two halves. The first 6 months of the year were characterised by rising equity markets, driven by strong corporate earnings and increased consumer demand for goods and services. This recovery was also accompanied by labour shortages, supply chain issues and rising inflation which the market was expecting to be transitory and short-term. In the second half of the year, both global bonds and equities fell heavily as inflation set in, with the Ukrainian war compounding many economic issues leading to fears for a global recession.

Aside from a major humanitarian crisis, the Ukraine conflict was judged by the International Monetary Fund in its world economic outlook as likely to contribute to a significant slowdown in global growth this year. The war also contributed to rapid increases in the prices of fuel and food, compounding the inflationary impact of pandemic-related supply chain disruptions. China’s major cities have continued to spend much of their time in sporadic, government-imposed lockdowns.

Most central banks, including the US Federal Reserve and Reserve Bank of Australia, have moved to counter high inflation by raising interest rates. The RBA expects interest rates to continue to move higher and will likely also withdraw other stimulus in the months ahead, although it forecasts inflation to peak later in 2022. The expected increases in interest rates have severely impacted the bond market, with falling values not seen in decades, such that investors felt there were few places to hide from the market volatility.

Markets will always face challenging periods, it is the price we pay for higher returns. However, when you cut through all the noise, investors that take a long term view and create diversified portfolios that are aligned to robust plans will be rewarded.

The information provided on this site is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different and you should seek advice from a financial planner who can consider if these strategies and products are right for you.

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