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Sit tight: turbulence is normal

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Summary

It’s been a tough month for markets but the underlying economy still supports investing.

2 min read

October has been volatile for investors but we see a solid global economy and positive environment for investors despite recent market turbulence.

The first week of the month saw stock markets sell off, largely based on market fears that rising borrowing costs in the US could dent company profits.

While market falls can be alarming for investors, we think there are reasons not to get too gloomy about such short-term shocks:

  • Company profits are improving – US corporate earnings are expected to rise by 21% in 2018, according to US investment company Raymond James
  • Employment is strong – the UK and US unemployment rates are at multi-decade lows, meaning more people have money to spend, which is a key driver of economic growth
  • Central banks are making moves to raise interest rates and rein-in economy-boosting policies, and that shows a positive economic outlook – the US Federal Reserve alone has raised rates eight times since 2015

 

The missing tell-tale signs

Lilian Chovin, Investment Strategist at Coutts, says: “There are usually certain tell-tale signs that a severe market downturn is on the way but we are seeing no sign of them at the moment.

“For example, previous market slumps have been preceded by what market analysts call ‘euphoria’, when asset prices rise far beyond their worth creating a dangerous imbalance in markets. Currently, we do not see any such imbalance, partly because investors remain cautious.”

It’s important to remember that falls like those we have seen this month are based on short-term developments.

Markets will rise and fall day-to-day – that’s investing – but we at Coutts are long-term investors and encourage our clients to take a long-term view. This approach relies much more on economic fundamentals – the foundations on which markets sit – than market moods.

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“There are usually certain tell-tale signs that a severe market downturn is on the way but we are seeing no sign of them at the moment.”
Lilian Chovin, Coutts Investment Strategist

Temporary turbulence

Investing is a bit like catching a long-haul flight. You might hit some turbulence on the way but it generally passes. Similarly, markets will hit turbulent patches from time to time but they’re often only temporary.

There are two recent market events that demonstrate this. Firstly, the FTSE 100 fell sharply following the EU referendum result in 2016, but has risen around 30% since. It’s worth remembering, though, that past performance should not be taken as a guide to future performance.

Secondly, markets also fell in February this year – in a more aggressive period than we have seen in October – but again soon recovered. We opportunistically added to our investments in the FTSE 100 when prices fell and that benefitted our portfolios later in the year.

There’s no doubt that volatility is becoming a theme in markets this year and we are certainly not downplaying the challenges. We will continue to constantly monitor markets looking for similar opportunities while also monitoring risks to ensure we’re doing all we can to manage our clients’ wealth in the most appropriate way.

Find out more about how Coutts can support your investments through all market conditions.

 

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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