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Understanding share market resilience amid economic uncertainties

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By Capital Partners Markets and Investments

Globally, on average, share markets are up around 15% from their lows in mid-June.

Logically, it’s hard to comprehend how this could be the case with daily headlines constantly highlighting the negative economic news including high inflation, rising interest rates, the Ukrainian War, and the prospects of a global recession.

On top of this, we are starting to see a wave of redundancies across the globe, led by Amazon and Meta who are planning to lay off 10,000 employees each, and Elon Musk firing half the Twitter workforce.

It can be easy to get swept up in this wave of negative headlines, but it’s important to understand that the economy is not the share market.

Share markets are forward-looking and are much more interested in what the future holds, as opposed to dwelling on what happened in the past, or even right now.

The chart below demonstrates this by using the 2008 Global Financial Crisis as an example. A recession wasn’t announced in the US until December 2008, by which time their share market had already fallen 42%. By the time it was announced the US was out of the recession, the share market had already recovered 54% from the bottom.

What’s taking place in your portfolio?

In the Roadrunner cartoons, Wile E. Coyote would chase his nemesis relentlessly, even running off cliffs and continuing running while in mid-air. It was only when he looked down and realized there was no longer any support, that he would fall.

This gives rise to a term in financial markets called “a Wile E. Coyote moment”. When investors realise that shares in a company have been running without support for a long time and prices that should have long since been gradually coming down, suddenly collapse.

For a while in the 2010s, the large global technology FAANG companies (Facebook, Amazon, Apple, Netflix & Google) seemed untouchable. All you had to do was buy shares in these companies and watch them go up in value.

However, due to a combination of inflation, rising interest rates and company-specific issues, the FAANG companies have had their ‘Wile E Coyote moment’. Facebook (Meta) is down 68% from its 2021 peak, Amazon -50%, Apple -19%, Netflix -60% and Google -32%.

This reinforces a key investment concept that a struggling company can make an excellent investment at the right price, while a wonderful company can make a terrible investment at the wrong price.

Whilst we will always maintain broad diversification in your portfolio, we tilt towards Value companies. Value investing is fundamentally about making sure you are buying good companies at the right price.

The chart below shows the largest 40 companies that have migrated from being categorised as Growth companies to Value companies from June 2021 to June 2022, primarily due to a fall in their share prices. Within your portfolios, you will see increased exposure to these companies, now that they are more appropriately priced.

Looking forward

In markets, nothing is as dependable as cycles. Over time, the economy will continue to expand and contract and markets will rise and fall. Your portfolio is positioned to capture long-term market returns that are delivered through these cycles and is continually adjusted to ensure you are weighted towards profitable, appropriately priced companies that have higher expected long-term returns. The construction of these portfolios is backed by evidence and Nobel Prize-winning research.

While we may not necessarily be out of the woods with this current crisis, history continues to teach us to take a long-term approach and have an optimistic perspective on markets. Despite all the challenges and crises over the last 100 years, markets have always recovered and endured to create wealth and prosperity.

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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