With the rising level of news and market panic in response to the US administration’s tariff announcements, we felt it timely to summarise the views of our recent meeting with the Akambo Investment team.
Background
After a couple of years of choppy but strong gains following the COVID-19-induced high inflation environment, there is a new sense of investment market trepidation following the recent US administration tariff announcements.
To be fair, equity valuations were vulnerable to a market shock, especially in the over-valued tech-ai sectors of the market. This has led to a broader sell-off in the face of global trade uncertainty with the S&P500 (US market) down 12.91% in the last month, and the ASX200 (Aussie market) down 5.81% in the last month.
No time to panic, perspective is important
While we have seen a significant market pullback over the last month, on an annual basis, the S&P500 (US market) is down 1.47% and the ASX200 (Aussie market) down 1.36%.
We understand as advisers, and investors ourselves, the nervousness that market drops can create. Especially with the barrage of “panic headlines” in the news.
It is at these times, most importantly, that we remind ourselves to wisely stick to fundamental investment principles and avoid making hasty decisions based on market volatility. Opportunity often arises when things seem most chaotic.
How have we responded in client portfolios?
We have slowly been increasing cash levels within our growth portfolios since early 2024. This has been partly due to profit taking but also due to a lack of undervalued opportunities as the technology and financial sectors continued to rise beyond reasonable valuations. Our relatively high cash levels and under-weight participation in the tech-ai sectors, has hurt our upside performance on a relative basis to the market indices over the last 12-months but will prove to be a wise course of action now the market has pulled back.
Taking a measured approach, we see the current market correction as an opportunity to invest in high-quality stocks at lower valuations. Investment markets have proven over many decades that investors with a long-term perspective can benefit from purchasing undervalued assets during periods of market uncertainty.
We have seen this before, and we will see it again
The global “trade reset” initiated by the US Administration is a legitimate concern that we have to deal with that will affect asset prices and sentiment for the coming months. Worry is nothing new – in fact it’s how we earn returns. In the last 30 years (1994-2024) we’ve experienced the following:
- 1994 Bond market crisis
- 1997 Asian currency crisis
- 2000 Dot.com bubble & tech wreck
- 2001 9/11 and Bali terrorist attacks
- 2001 Troops enter Afghanistan
- 2003 2nd Iraq War
- 2007-2008 Subprime crisis and Global Financial crisis
- 2012 Peak of the European debt crisis (the PIIGS)
- 2016 Brexit and China Demand collapsing
- 2020 Covid-19
- 2022 War in Ukraine, breakout of inflation, and the highest relative increase of interest rates in 50 years
During this period, we have had all types of governments and economic events in Australia, US and abroad. Yet the following chart shows that markets continue to march on as new opportunities arise out of periods of panic.
Opportunity cost – the risk of panic
The risk of panic selling or trying to get too cute with market timing is simply too high. The famous saying of “time in the market, not timing of the market” is well illustrated by the damaging effect to investor returns by simply missing a handful of the share markets’ best days.
Dynamically-tilting a portolio to reduce risk and navigate prevailing market conditions makes sense; panic selling most often leads to long-term dissapointment.
Investing with a clear head and a clear strategy
While there are potential risks in the current environment, we know abandoning our strategy doesn’t work.
How do we manage the quandary to stay invested yet still manage the risks at the same time? We suggest a well-worn path…
> Step 1 – Clearly define what risk means to you
As your advisers, we have spent considerable time understanding what is most important to you, considering your short and long-term objectives and ensuring you have an appropriate investment strategy to suit. Your strategy is designed to maximise the chance of meeting your goals, cashflow needs and the structuring of your investments so you are not a forced seller of depressed assets.
Risk is anything that stands in the way of achieving your goals and/or cashflow needs. Panicing in the face of market volatility is not a way to reduce risk.
> Step 2 – A resilient investment strategy that works
We manage investment risk primarily through Quality and Diversification. Further enhancements are made through dynamic asset allocation. and by managing cashflow.
Given you have an investment strategy tailored to your needs and objectives, structured to an appropriate timeframe, and proactively managed to modulate the amount of risk you take on, you are well placed to weather any weaker or more volatile market phases.
Rest assured, we have a disciplined valuation and risk-governance framework in place, with an optimised investment structure designed to prioritise the funding of required drawdowns (e.g. pensions) from the cashflow (dividends, bond coupons and interest) that contnues to be generated in your portfolio. This allows us to quarantine vaolatility risk and use capital and cash wisely to grow your portfolio reliably over the long term.
In the words of John C Bogle (founder of Vanguard) “Stay the course. No matter what happens stick to your investment program. I’ve said stay the course 1000 times and I’ve meant it every time. It is the single most important piece of wisdom I can give you”
> Step 3 – Protect downside risk, but focus on the opportunity around the corner
As discussed above, our risk management framework provides downside protection by raising cash levels and dynamically tilting portfolios to suit prevailing market conditions. At the same time, we are on the hunt for opportunities that are likely to arise from a number of future tailwinds:
- Lower Valuations: Certain sectors of the market were overdue a correction and this provides opportunity to purchase quality investors at much more reasonable prices.
- Tax Cuts: A range of tax cuts and deregulation initiatives are scheduled for approval in the US that will positively impact corporate profitability, leading to higher earnings and potentially higher stock prices.
- Infrastructure/Energy Spending: Increased spending on global infrastructure and energy projects will stimulate economic growth, benefiting sectors such as construction, materials, and industrials. The demand for electricity and related infrastructure to back cleaner-economies, AI, and robotics-technologies has not gone away.
- Job Creation: Global infrastructure projects, expanding US energy investments, and the repatriation of the US manufacturing sector will create jobs, boosting consumer spending and overall economic activity.
- Interest rates: Despite remaining stubbornly high, we anticipate the interest rate cycle to be lower over the coming years lowering the cost of business and funding of new projects.
Regardless of when volatility arises, we know both good times and bad times don’t last forever. Your greatest asset is sticking to a clear wealth and invstment strategy with an advisor in your corner. Take comfort knowing we have assessed your needs and utilise an investment process that has proven to withstand the hard times.
