Global Market Overview – June 2022
The first six months of this year have been tough with pretty much all markets, other than commodities and energy, down sharply. The MSCI World is down over 20%, and bonds around the world have seen double-digit losses. June offered no respite from the sell-off. The S&P fell almost 8% over the month, and bond yields continued to rise.
Market sell-offs are often the most interesting (and stressful) times for investors, particularly multi-asset investors like us. The lay of the land changes. Markets that investors considered expensive can become cheap and momentum can shift quickly.
During the Covid drawdown, many investors latched onto the phrase ‘buy the dip’, and echoes of this seem to be coming back. At a high level, buying the dip worked after Covid. There was a short, sharp sell-off, then markets rallied for the best part of two years. So, what would a devout buy-the-dipper do now, and why should you take care when buying the biggest dips?
If you are looking to buy the biggest dip, you’d be looking at growth stocks and US tech right now. Eye-watering valuations and duration exposure has meant that these stocks have suffered most in the risk-off, high inflation environment we have seen so far this year.
Let’s start by looking at how much US tech valuations have dropped off:
This chart shows the price-to-earnings ratio of the Nasdaq over time, a standard measure of value. We think it’s clear that, relative to history, these stocks aren’t screamingly cheap in Price-to-earnings terms. They’ve been considerably cheaper for large parts of the past 20 years and it wouldn’t be surprising if the ratio fell further.
Something else worth looking at is what usually happens when the tide changes from growth to value or vice-versa:
This chart shows the percentage returns of a value index minus the percentage returns for a growth index each year since 1927. So, a positive number is value outperforming and a negative one is growth outperforming. What you can see is that when value starts outperforming, it tends to do so for a number of years – there are clusters of positive bars.
Piling back into growthy tech stocks – buying the biggest dip – could be a risky strategy as the relative outperformance of value is unlikely to have run its course.
Core views
Growth will be stronger than the last decade... Strong consumers, confident businesses and supportive governments mean one thing; stronger growth. The mushy, slow, volatile growth of the last decade will vanish, to be replaced with a more confident and self-sustaining growth cycle.
Inflation will be higher than the last decade… The stronger demand does mean higher inflation too. To be sure this does not mean worryingly high, but higher, nonetheless. This will have huge implications for interest rates and savers need to be ready.
Summary
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
July 2022
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited