True Potential Investments’ Chief Investment Officer, Colin Beveridge, explains the reasons for recent weakness in the markets and how this can provide opportunities for investors.
“In our view, there are two key uncertainties causing the recent market weakness. These are:
- the difficult political and economic situation in Greece; and
- the possibility of interest rate increases in the US and UK.
The determination of the Greek government to avoid imposing cuts on pensions and raising VAT is meeting strong resistance from creditors who are intent on imposing further austerity. Breaking the impasse has proven difficult, although Greece has been given temporary respite by a credit extension from the ECB until talks on Monday.
Uncertainty is still very much the case though and this causes investors to speculate about possible outcomes. The worst fears range from ‘Grexit’ (Greece leaving the Euro) to ‘contagion’ (the risk that other peripheral European countries with large economic imbalances will follow further down the line). None of this is impossible, but it is far from certain. The intervening stage for Greece is debt relief, which is more likely, but may come with conditions. It is ultimately a game of high stakes that no one wants to lose.
On the question of interest rates, this is a much broader issue. The view of investors about the future trajectory for interest rates sets the tone across all developed markets. Any suspicion that rates will have to rise quickly would be disturbing for investors and also quickly feed into emerging markets too.
A rise in rates is on the cards, but the reasons are generally positive. Low inflation and major economies not yet on a growth path that central bankers feel can be defined as ‘sustainable’ both suggest slow and modest increases. This means that when interest rate rises do come, it is because there is more confidence that economies will not be blown off course.
What can we conclude? First, the investment backdrop is uncertain with unknowns that could have serious implications. Yet think back over the last five years and ask: ‘Is this any different? Have we been here before?’
There will always be an element of uncertainty in the markets and this is a key reason why we believe diversification plays an important role in every investor’s portfolio. By using professionally-managed, multi-asset funds, investors can reduce their investment risk by holding assets from different geographic regions, including those outside the EU. This philosophy is an important part of our own range of fully-diversified True Potential Wealth Strategy Funds.
We know it is only natural for investors to worry. However, long-term periods of weakness give investors an opportunity to ‘pound cost average’ where adding a regular amount to investments can work in their favour. By buying fewer units when markets are up, but more when markets are weak, they get a better average price for their funds. And, by utilising modern technology such as impulseSave® to invest small amounts, often, investors can maximise their returns quickly and easily.
At True Potential Investments, we believe the adage that “the best of opportunities spring up in the worst of times” and will continue to look for ways in which all our investors benefit in these uncertain times.”
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