Fluctuations In The Value Of Investments – 1Q/2018

History shows markets and hence the value of investments rise and fall over time. Fluctuations in the value of investments over a few weeks should not be a concern. It is the long term trend that matters.

The FTSE is down about 7% since the beginning of 2018. That may be a concern to some but to put it into perspective between mid 2016 and Jan 2018 the FTSE100 rose over 30%. Over time an individual’s investment portfolio may perform better (or worse) than the FTSE depending on the balance of assets and management of the fund.

If the FTSE were to fall a further 5% between April and July 2018 (and there is no evidence it will) then that would be a trend worth watching and may prompt some asset rebalancing in a portfolio. However, it should not prompt knee jerk reactions that could be regretted later.

Markets rise and markets fall all the time primarily based on investors perception of future risks. So what risks have driven the FTSE down since the start of 2018. With thanks to our associate David (DAN) Norman of TCF Investments, we offer our view.

The positives in the market have already been recognised in asset prices. Investors may believe there is no room for any upside value based on current market conditions. it is possible that this year will see the peak in a positive long term economic cycle.

Recent and forecast increases in interest rates could become too much for economies and equity markets that have grown in recent years due to benign economic conditions.

US tax cuts and higher federal spending will add around 0.5% to world GDP but this will add over $1 trillion of debt over the next 10 years. This looks manageable while interest rates are low, but there is a risk it could come back to haunt future generations if interest rates were to rise above projected levels.

General global political threats remains. There remains a threat of an expanding conflict in the middle east. There is an increasing threat of Russian aggression with an obvious economic link to Russian money and Russian control of key natural resources (particularly in continental Europe). Although the risk of a hard Brexit has reduced the uncertainty surrounding Brexit remains.

The UK Equity (shares) market has done very well with weak sterling but with the risk of hard brexit receding sterling could rise.

On the positive side, recent growth momentum in the world continues to be positive and seems likely to continue this year overall. Forecasters are expecting world GDP growth to be around 3% in 2018, similar to 2017. It still seems likely that the “Goldilocks” environment of world-wide growth and low, rising inflation can continue in 2018 providing a positive backdrop for equity markets.

The nature of the risk may change but there are always risks that could impact the value of an investment. There are always potential positives that could drive the value of investments higher. There are always wider political risks. The value of investments can rise or fall over the short term. It is always the long term trend that matters.

 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance. This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action.