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Turbulent times have emerged for individuals with share portfolios, equity ISAs, and pension funds reliant on stock market performance to ensure a secure financial future in retirement. Amidst stock market volatility triggered by trade tensions and tariffs, investors are navigating uncertain economic waters. While the recent market downturns are less severe than those experienced during previous financial crises such as the 2008 banking crisis and the 2020 global lockdown, experts caution that the danger has not yet passed for investment portfolios and retirement savings.
Navigating Market Uncertainty: Expert Advice for Investors
Although certain markets, including Hong Kong, China, and the UK, experienced a partial rebound from losses incurred on ‘Ugly Monday’ – with Hong Kong’s 13.2% drop marking its largest decline since the 1997 Asian financial crisis – the global economic landscape remains far from stable.
Markets in Taiwan, Indonesia, and Thailand faced continued declines on Tuesday, and further stock market turbulence is anticipated in the near term as global economies adjust to the deglobalizing effects of protectionist tariffs.
This unsettling climate has prompted prominent financial analysts to openly discuss the possibility of a US recession (according to Jamie Dimon, CEO of JPMorgan Chase), a global economic downturn (as suggested by Bill Ackman, a US hedge fund manager), and additional stock market declines.
Larry Fink, CEO of BlackRock, a global asset management firm, has indicated that markets could potentially fall by another 20% from current levels.
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Tariffs and Market Sentiment: Uncertainty and volatility have returned to the market as a result of recent policy actions.
This situation presents significant concerns for investors. Heightened uncertainty, market volatility, and negative market sentiment have resurfaced prominently, and a swift resolution to the challenges stemming from recent policy decisions seems unlikely.
Caroline Shaw, multi-asset portfolio manager at Fidelity International, recently discussed the ‘major economic event’ initiated by recent trade policies.
She acknowledged these as anxious times, yet highlighted potential opportunities for astute investors – a perspective echoed by several investment professionals consulted by financial news outlets recently.
Essential Principles for Investors
While the recent stock market correction is unsettling for investors, reacting impulsively by selling shares and funds, particularly those intended for long-term growth, would be a significant error.
Nigel Green, chief executive of deVere Group, a financial advisory firm, stated that “Experienced investors recognize that volatility is inherent to achieving superior long-term returns.”
He further noted, “Investors who maintain their positions and implement strategic actions during periods of market fluctuation are consistently the ones who realize the most substantial gains. Recoveries frequently commence when market sentiment remains deeply pessimistic.”
Therefore, it is advisable to resist the urge to liquidate holdings in reaction to market downturns.
It is worth reiterating that for individuals focused on building wealth over the long term, remaining invested in the market generally proves more beneficial than attempting to time market entry and exit points.
Alan Miller, chief investment officer of SCM Direct, a wealth management company, while expressing caution regarding the valuations at the higher end of the US stock market, affirmed that long-term investors typically outperform those who engage in frequent market trading.
For instance, during the 2010s, an investor holding the S&P 500 Index (representing the largest US-listed companies) would have realized a 190% return throughout the decade.
However, missing just the ten best trading days would have reduced this return by half, to 95%.
Thus, for those making regular investments into pensions or equity ISAs, it is recommended to maintain this strategy.
Continuing regular investments allows for the purchase of shares or funds at reduced prices compared to previous months and leverages valuable tax advantages.
Pension contributions, for example, benefit from tax relief (at a minimum of 20%), along with potential employer contributions for workplace pensions.
These benefits are highly advantageous. Moreover, pension funds often allocate investments across a diverse range of assets, not solely equities, thus offering some protection against equity price declines.
For ISAs, maximizing the annual £20,000 contribution allowance provides an opportunity to establish a tax-efficient investment vehicle, where investment growth and withdrawals are generally tax-free.
Strategic Approaches for Current Market Conditions
In recent discussions, numerous wealth managers have offered insights into how investors can optimize their portfolios to withstand the repercussions of protectionist trade policies and achieve long-term growth.
While diverse perspectives exist within the investment field, several prevailing strategies have emerged.
1. Diversify Risk Exposure
Diversification is critically important. Over-reliance on the US stock market, and specifically the ‘magnificent seven’ stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla), to drive portfolio performance is no longer a prudent approach.
Matthew Yeates, deputy chief investment officer of Seven Investment Management (7IM), observed, “The past decade has been characterized by US exceptionalism: a focus primarily on US assets.
Recent trade policy shifts have arguably curtailed this trend of US equity outperformance.”
He added, “If trade policies are shifting towards inward focus, we anticipate investors will broaden their horizons outward. In this evolving and uncertain environment, investors should pursue greater diversification across equity markets and asset classes to successfully navigate increased volatility.”
Anticipated Stock Market Instability: Further market fluctuations are expected as global markets adapt to the effects of protectionist trade measures.
This perspective is shared by Ben Conway, chief investment manager of Hawksmoor Investment Management, and Tom Stevenson, investment director at Fidelity International.
Mr. Conway emphasized that “Portfolios should consistently maintain diversification across geographical regions and asset classes. Rebalancing your portfolio in response to recent market volatility may be a prudent step.”
“This involves taking counterintuitive action: increasing allocations to underperforming assets and reducing allocations to outperforming assets to realign the portfolio with desired diversification targets.”
Mr. Stevenson noted, “Recently, a survey indicated that a majority of investors believed new trade policies would benefit the US economy while negatively impacting the rest of the world.
This highlights the critical importance of diversification. Even with clear policy announcements, the ultimate consequences and beneficiaries are often difficult to predict.”
Many global funds have significant holdings in the ‘magnificent seven’ stocks. Mr. Miller pointed out that “These are not truly global funds; they are heavily weighted towards US equities.”
Investors should review fund factsheets to assess holdings and geographical exposure.
If these stocks dominate, reducing exposure and reallocating capital may be advisable.
Mr. Miller cautioned about the concentration risk, noting that these stocks now comprise a substantial portion of major market indices.
He identified “valuation and concentration risks” associated with these stocks as significant.
He recommends a strategy of investing in US funds that provide equal weighting across all S&P 500 companies, thus reducing concentrated exposure to the ‘magnificent seven’.
Funds from providers like Invesco and iShares offer such approaches. Alternatively, he suggests exploring US small-cap funds or dividend-focused US funds.
Rob Burdett, head of multi-asset portfolios at Nedgroup Investments, concurred, suggesting US small-cap stocks are “attractively valued and less vulnerable to tariffs” compared to larger US corporations like Apple that rely on international supply chains.
2. Consider Gold Allocations
Despite a recent price dip, most fund managers continue to view gold as a valuable portfolio diversification tool.
Mr. Burdett from Nedgroup considers gold an effective “buffer” during periods of market anxiety.
He cited the strategy of Julian Baring, a prominent gold investor and founder of BlackRock Gold & General Fund, who advocated for a consistent allocation of around 5% of a portfolio to gold.
Mr Baring’s strategy involved rebalancing the gold allocation back to 5% if it drifted outside a target range.
“This rebalancing approach, while applicable to any asset, is particularly relevant for gold due to its unpredictable price movements.”
Market Rebound: While some markets have recovered partially, broader stability remains uncertain.
3. Evaluate UK Equities
While the UK economic outlook is currently muted, certain fund managers perceive the UK stock market as increasingly appealing.
Mr. Miller stated, “UK equities offer attractive dividend yields and are currently undervalued compared to global peers, trading at a significant discount.”
This sentiment is echoed by other fund managers. Ben Peters, manager of the Evenlode Global Income Fund, noted that UK-listed businesses constitute a notable portion of his portfolio.
“We identify numerous opportunities within the UK market, particularly in leading businesses generating strong cash flow and attractive returns on capital, leading to dividend growth,” he explained.
Key UK holdings within his fund include Unilever, Reckitt Benckiser, and Experian.
Mr. Conway also agreed, stating, “UK equities, especially smaller companies, appear attractively valued.”
Hawksmoor’s preferred UK funds include Aberforth Smaller Companies, Artemis Select, Temple Bar, and Teviot UK Smaller Companies.
4. Consider Japanese Equities
River Global, among other investment firms, recognizes considerable prospects in Japanese equities.
William Lough, portfolio manager, explained, “Japan is home to numerous companies with dominant positions in niche markets, enabling them to achieve strong profit margins.”
“Increased corporate governance focus is driving higher shareholder returns through dividends.
Furthermore, increased merger and acquisition activity is anticipated. Japanese equity valuations appear particularly appealing for long-term investors, especially following recent market declines.”
Japan could potentially be among the first nations to reach a tariff agreement.
Final Considerations
Mr. Conway from Hawksmoor concluded, “Effective investing involves constructing a portfolio resilient to diverse economic conditions.”
“This ensures that unforeseen events like tariffs are mitigated by offsetting assets within the portfolio.”
Prudent investment strategies emphasize diversification and consistent investment into tax-advantaged accounts like ISAs and pensions.