MARKET ANALYSIS: THE INVESTMENT ENVIRONMENT
By: 6560 Colonel (Ret’d) Andrew Nellestyn OStJ HCE MPPE PhD PEng
The 2008 global recession has created turmoil and uncertainty in the market and left no corner of the world untouched. Volatility reigns. What had been characterized as normal market behavior including time-tested paradigms which afforded a reasonable degree of predictability no longer exists. The recent heated political debt/default debates in Washington added fuel to an already raging fire as has yesterday’s massive sell-off which decimated the markets triggered by S&P’s downgrading of the US credit rating.
A new normal is evolving but is not yet defined nor universally accepted. A decade may pass before some semblance of comfort and stability is established. Geopolitical, natural, economic and financial tsunamis have resulted in a feeling of increased anxiety for investors and traders alike. Governments, regulatory bodies, financial institutions, corporations and the public at large have been thrown into a state of fear, angst, indecision and paralysis for which no quick fix can be found. Psychological reaction, adverse sentiment, has caused a stampede resulting in market turmoil. Confidence in the market, financial institutions and governments has been severely shaken on both sides of the Atlantic and, although to a lesser degree, in Asia.
Portfolios have been decimated. Wealth has been destroyed. Retirement plans have been shattered. There is little on the horizon which would point to a turn-around in the immediate and near future.
In short confidence in the market has vastly eroded and replaced by a lack of trust and diminished confidence in those who manage and shape the financial dynamics which govern and underpin the market.
The result is that there now prevails a reluctance to participate in the market and to withdraw to safer and more certain and predictable havens to grow wealth rather than by investing or by trading. Risk aversion reigns. This is particularly true in the case of retail investment whose clientele consists largely of the public at large, that is, non-institutional investors.
Notwithstanding the above description of dismay which presently permeates the investor/investment community, it is broadly recognized and accepted that the market has enjoyed consistently high level of returns and that over time the market will rebound and provide a preferred investment vehicle.
It is noteworthy nonetheless that while markets lost significant value as a consequence of S&P’s downgrading, US treasury bills and the bond market, including investors and financial institutions, enjoyed a surge of confidence.
Credibility, confidence and trust must be restored before both the market provides reasonable and predictable returns and the retail investment community and its existing and prospective clients deem the market as a viable engine of wealth creation.
The challenge for the market and wealth advisors is thus, first and foremost, to position the market as one of progressively increasing positive returns and to convince and assure investors that this is both possible and credible. The challenge while daunting is surmountable.
This calls for and exacts that wealth advisors:
1. Ensure that portfolios are sufficiently tailored, diversified and managed to provide clients with the confidence that wealth creation strategies are robust enough to withstand the vicissitudes of a market that is presently volatile in nature and that their portfolios provide an assured income and/or promise of gain particularly in the mix of cash, bonds, dividends and equities.
2. Keep abreast of all factors which bear upon the market and build these into their portfolio strategies.
3. Develop client specific financial management strategies and review and adjust these strategies to position their clients for gain and/or steady income streams.
4. Involve clients as partners in the process by, for example, regular consultation, communication and dissemination of market alerts and the potential consequences and recommended remedies as these arise.
5. Communicate with their clients by personal periodic reviews, email and a dedicated current website via linkage with the investment firm’s website or a wealth advisor’s own website.
It is thus incumbent on the investor to choose a reputable investment firm and wealth advisor whose approach to wealth management and communication and consultation with their clients reflects the activities as described above.
As discussed a climate of anxiety and fear exists within the investor and investment community which will require an extraordinary effort to surmount the hesitancy/reluctance to play in the market or to change investment service provider allegiances. This barrier will exact that a strong case be made for market participation/entry or change of any nature and will take more time to realize than has been the norm particularly than was the case in boom times.
Indeed, wrt to what constitutes normal, the past is no longer a barometer against which to gauge an evolving new order of international, globalized financial paradigms. The shock of 2008 which saw markets drop 50% in value thereby resulting in tremendous loss of wealth still bears heavily on global economies and investor confidence. Governments and central banks have reacted by shoring up weak sovereign funds, enacting new regulatory measures principally focused on the financial system, e.g., banks and trading exchanges. These too are evolving and will have to be adjusted as the new order/norm begins to define itself.
There will be many who are quick, too quick, to criticize and wish for the return of the good old days, that is, get government out of their hair. Those days are over never to return. Others will think not enough is being done and more draconian measures are imperative. The balance lies between these two extremes.
There is no easy quick-fix remedy. The market is extremely volatile. Investors would be best served to sit tight, ensure that they have a cash position which will permit them to profit from arising opportunities of which there are many and work with their wealth advisors as to how best to achieve this.
Note, however, that the market is becoming more complex and the emotional factor is presently much in play. Sound, informed and reasoned advice is the watch word. Do not get carried downstream by the fast current of emotional, irrational knee jerk reaction. This is a recipe for disaster. Calm must prevail.
Remember that on a comparative basis the market has and continues to outperform other investment/wealth creation vehicles.
While the market is unlikely to rebound to any degree of significance in the immediate future, there exist investment opportunities which promise reasonable ROIs and income streams to address the needs of investors; collectively and individually. Chicken Little solutions are disastrous.
A team approach, that is, the investor and the wealth advisor working together in consultation, is imperative. The market moves too quickly and is presently too volatile to enable those who do not have the time and/or access to market events as they evolve or to access to the cornucopia of data and analysis which investment firms and their wealth advisor have readily at hand.
Tsunamis have existed in the past; some of which were severe. Yet markets have recovered and wealth has and continues to be created.
The recent sale of US treasury bills and bonds following S&P’s downgrading of US credit worthiness is indeed a vote of confidence and reinforces the continuation of the US as a safe haven in a sea of troubled markets.
Lastly, although not entirely sheltered from turmoil elsewhere around the globe, Canada’s economy continues its sterling performance due in large measure to the soundness of its financial institutions, security regulations and economic policies and direction.