What to make of the current market uncertainty in 2020


There are no two ways about it - 2020 has been an incredibly turbulent year for the markets. A pandemic, a US election and an uncertain Brexit still looms large to cap the year.

So, what approach should you take in the current situation?

Markets - emotion and fundamentals

Markets have both their fundamentals and a human-led emotional bias. 

In terms of emotional bias, there is a tendency to overreact to both bad news and good news, hence the huge swings when the prospect of lockdown loomed and the huge spike when news of a vaccine broke even though the impact will be medium term at the least. There are contract investors who invest when the market suffers a huge dip and sell when the market is peaking. Of course, it's impossible to pick those peaks and troughs accurately. 

While it may be tempting to keep all your money under your mattress in 2020, it is worth having a look at the history of markets and then to see the opportunities available. The history of markets strongly suggests that historic dramatic dips recover, although it's important to note that in 2020 we have seen more than one tip as the impact of lockdown and a slower than expected recovery led to a second dip.

With a little faith in history though, there have been a number of opportunities to invest post-dip. Some investors looked at sectors most impacted by the pandemic and took the brave decision to invest with the risk that individual companies may go bust, for example, airlines and hospitality which have been among the sharpest dips and rises.

Wise heads try to be aware of the emotion of markets, but also aware of the underlying fundamentals. 

Which companies are sold, unlikely to go bust and have both the fundamentals to weather the storm and bounce back in happier times, for example some of the stronger players in the banking sector with house prices starting to surge again and mortgages picking up?

There is the temptation to follow the herd and the huge spike that has seen technology companies who enable the work-from-home trend during lockdown. Take for example, Zoom's leap from 62 to 588 in a 12 month period. With a crystal ball, there were incredible opportunities but many of those are fading as people gradually return to work and the hyped price differs so much from the fundamentals. 

Another strategy is to drip-feed into the market believing in the long-term market trends that it will go up over time as it has for decades, albeit with historical events and recessions impacing. This takes the edge off the tips, but also reduces the potential for profits achieved by buying low and selling high.

Know your risk, choose your approach

It all depends on your appetite for risk as an investor and of course ensuring you have a solid plan not to over expose yourself - as we have seen in 2020, just about anything can happen!

For those with lower appetites for risks, there are low-cost funds that have a mix of bonds and equity that offer an opportunity for exposure to the market with lower risk.

Do your research, find what's right for you and the opportunities are there along with the risk...

Comments

Post a Comment

Popular posts from this blog

Explaining Gilt-edged securities (shortened to gilts)

Gilt-edged securities, also known as gilts, are debt securities issued by the government of the United Kingdom.   They are called gilt-edged securities because they are considered to be among the highest quality and most secure investments available, with a long history of low default rates and stable returns. Gilts are issued in a range of maturities, from short-term bills with a maturity of less than one year, to long-term bonds with a maturity of over 25 years. They pay a fixed rate of interest, known as the coupon, which is paid to investors on a regular basis, typically semi-annually. The principal amount of the gilt is repaid to the investor at the end of the term of the gilt. Gilts are issued by the UK Debt Management Office (DMO), which is an agency of the UK government responsible for managing the government's debt. The DMO issues gilts on behalf of the government to finance its borrowing requirements, and sets the terms and conditions of the gilts, including the coupon ra...
Read more

What is Financial Intermediation Services Indirectly Measured (FISIM)?

Financial intermediation services indirectly measured, or FISIM, refers to the value of the services provided by financial intermediaries, such as banks and other financial institutions, in facilitating transactions between borrowers and lenders.  FISIM is typically calculated as the difference between the interest rates paid by borrowers and the interest rates received by lenders, minus the costs incurred by the financial intermediaries in providing these services. FISIM is an important concept in national accounts and macroeconomic analysis, as it helps to capture the economic value of the services provided by the financial sector. It is typically included in the measurement of gross domestic product (GDP) and other macroeconomic indicators, as it reflects the contribution of the financial sector to economic activity. There are several ways in which financial intermediaries provide value to the economy through their intermediation services. These include: Information gathering an...
Read more

Best and worst performing UK FTSE All-Share sectors in 2020

Image
What a year 2020 was for investing.  Record-breaking lows, recoveries, logic, panic and confusion all thrown together with fortunes made and lost. A pandemic, Brexit and a sometimes chaotic US Election made for a perfect storm in instability. But now the dust is settling which sectors fared best and worst and more importantly why?  Let's look at the UK in this article. Data from IG  from H1 2021 (Jan-July) shows the disparity between sectors in the FTSE All-Share: Sector                                    Average share price return Healthcare                          +5.1% Materials                                    -1.8% Information technology      -2.1% Utilities ...
Read more