Investing – a long term story

We have seen some extraordinary years speaking about equity and multi asset performance. Interest rates were low, volatility – representing the average daily price changes – was comparably low.

Especially after the strong fall in market prices we have seen during the “Corona Shock” with the first “Lock Down” and almost closing down of global economies, we have seen a strong market recovery and investors were benefiting from the positive sentiment and rising prices covering the seen market draw-down within 6 months, ending up in positive territory today!

Why was the “Corona Shock” driving the market that intensively…

When “Corona” appeared, it was something totally new. Nobody knew about it. Nobody knew how to handle it, how it will affect himself. We were all protecting ourselves by hiding at home.

Market participants reacting quite similarly to new information they can not judge immediately. Taking the example of “Corona”, also on markets the first reaction was “protecting” the invested money by quickly selling or hedging risky assets (equities, bonds with low ratings, …) – assets that tend to overreact during corrections.

After the market participants got a clearer picture of the situation, learning about all the measures taken by central banks and governments to support the economy, they got more confidence and were able to better judge the situation. Market participants started to re-position adding risky assets, starting the recovery of asset prices that led to the excellent performance seen.

“We have seen some extraordinary years speaking about equity and multi asset performance. Interest rates were low, volatility – representing the average daily price changes – was comparably low.”

Christian Gaier

^{© Photo: Erste AM}

… and what is the difference to today?

The current market situation is driven be the following factors:

1. The year-end effect – a technical factor

We argue investing is “long term” (starting from 5 years) putting money to work in a diversified portfolio (a fund with a selection of multiple single titles). Due to year end the period mid of November to end of January is traditionally used by investment management firms to review and adopt the investment strategy for the money they are responsible for. This leads to changes in allocations globally and effecting the markets ending up in “Christmas Rallies / Corrections” or “Start of the year Rallies / Corrections”. We also review the strategies for our clients on a regular basis and we are not getting nervous in the short run by market movements triggered by these re-positionings.

2. New “uncertainties” that need to be judged

The world is continuously changing, and geopolitics got more into focus. Uncertainties concerning Russia and Ukraine – including potential sanctions – as well as volatile China/US relations increase uncertainties.
COVID is losing importance for the markets, but nevertheless Omikron variant – especially potential lock-downs – were reducing market confidence a bit as this could again effect supply chains and dampen the current growth outlook.   
Global central banks are finally at the stage to prepare markets for slowly rising rates. Bringing bond markets (especially those which were yielding negative) back into the play, into the focus of investors.

The question on the table: Are you a speculator or are you an investor?

As speculator, you might ask “What will happen tomorrow, in 5 days, in 2 weeks, … ?” You are thinking short term only, not about the long-term potential. You might wonder “Might I buy the assets cheaper or have a negative valuation on my asset?”. You might even think about to turn you negative valuation into a realized loss or not, losing the long term potential of an done investment you have seen when buying it.

As investor you will evaluate the situation for yourself. What were the arguments why you wanted to invest into the asset for a period longer than 5 years? What potential did you see at that point and do you still believe in it? Maybe it is an investment story of a changing world behind?
Markets had and will always have phases searching for direction, making investors doubt. Historically investing proved to be the long-term story – rewarding investors that did not got nervous in the short run.

Legal note:
Prognoses are no reliable indicator for future performance.