Five investor risks this summer

The strength and speed of the global economic recovery have been better-than-expected in our view, but the summer months may bring fresh challenges as ‘normal life’ finds its feet again.

Even before the pandemic, summer had earned itself a reputation for being a volatile time in markets – you may have come across the superstitious phrase, ‘sell in May and go away’. But does that anecdote do summer a disservice?

For Julien Lafargue, Chief Market Strategist at Barclays Private Bank, the numbers paint a more favourable picture. “In reality, over the last 20 years, you’re more likely to have experienced a down month at the beginning of the year than in summer,” he says. “If we look at average returns for the MSCI AC World Index over that time period, both January and February have finished down for 50% of the time - or in other words, in 10 out of those 20 years. That compares to only 35% for July and 40% for August.”

While history can’t determine the future, the context might help restore summer’s reputation somewhat. However, it doesn’t take away from the fact that seasonal investor nerves may be creeping in again.

Part 1: Five short-term risks

Against that backdrop, here are the five short-term risks we think are worth keeping an eye on. If there is any increased market volatility this summer, we anticipate it may be shallow and short-lasting.

1. We are approaching several peaks

The global economic recovery has been impressive, but there are signs some areas are slowing down, noticeably in China. Given the significance of the world’s second biggest economy, we’ve written about this in more detail in our July Market Perspectives.

2. Emergency purse strings could tighten

The gargantuan spending by governments and central banks in the heat of the pandemic battle was always going to be a temporary, extreme tactic. In light of the global recovery, the big spending can stop. That could translate into higher taxes and reduced support – both of which impact investor growth expectations.

3. Valuations leave no room for error

Although they remain attractive on a relative basis, equity markets continue to be expensive on an absolute basis. The MSCI AC World Index is trading at a 12-month forward earnings multiple of 18.7 versus an historical average of 15.8 (as at 5 July 2021). Any disappointment on earnings growth or monetary support, could provoke equity underperformance.

4. An equity market correction could happen

Global equities have rallied 88% from their March 2020 lows (as at 5 July 2021). Given that equity markets don’t go up in a constant straight line, and a 10% correction is considered as “normal” in any given year, a summer correction isn’t inconceivable.

5. A black swan event

Just like China’s surprise yuan devaluation in August 2015 or the flare up in the European sovereign debt crisis in August 2011, unexpected “black swan” events are always possible. While they are not specific to summer months, their impact tends to be amplified by the low attendance and volumes typical of this period of the year.

Part 2: Five reasons for optimism

Running in parallel with those five short-term risks, are several indicators which we believe support an overall mood of cautious optimism for investors. The top five are:

1. Fundamentals remain strong

While growth is peaking in parts of the world, others are just at the beginning of their recovery phase (Europe, parts of Asia). Meanwhile, July and August could potentially offer the best quarterly year-over-year earnings growth rate seen in decades, fuelled by pent-up economies re-opening from lockdowns.

2. There is no over exuberance

Although one could argue there are bubbles forming here and there (cryptos, Special Purchase Acquisition Companies (SPACs), “meme” stocks), a lot of air has already come out of them and they remain relatively well-contained. Broadly speaking, investors are somewhat cautious as they continue to anticipate risks on the horizon. The strong investor consensus of an equity market pullback may reduce the chances of it happening.

3. Shocks are transient in nature

Brexit, Donald Trump’s election and now COVID-19 are all recent scenarios that have had no lasting impact on equity markets.

4. There is always a bull market somewhere

Volatility and periods of stress can bring opportunities for active managers to earn their stripes. This is why we believe that it might be worthwhile for investors to consider the value of having some actively-managed exposure.

5. Diversification should continue to pay off

Owning a diversified portfolio of assets remains, in our view, one of the most appropriate courses of action to consider for anyone who may have concerns that volatility is about to rise.  If you’re a nervous investor, you might find the behavioural finance chapter in July’s Market Perspectives, particularly helpful.

Part 3: We’re here to help

In both good and bad times, we firmly believe that investing is best done with a marathon-not-a-sprint mentality.

As Julien Lafargue explains, “When there are short-term market bumps, it may feel counter-intuitive to keep your money invested. In those instances, it’s well worth remembering that even professional investors find it nearly impossible to time the perfect exit during a market downturn. And it’s equally hard to perfect a re-entry during a market upturn. Getting either one wrong can be very costly.”

He continues, “Staying calm during volatility and keeping your money invested for longer, should generally provide a more rewarding experience.”

If you have any questions about this, or any other investment topic which you think we can help with, please don’t hesitate to contact your Private Banker.

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