The exceptional feature of global markets in 2022 is the lack of safe investment options. And unlike previous downturns, this one is accompanied by inflation.
For investors – amateur or professional – the traditional lifebuoys of loss-making markets are simply not materialising.
Bonds, which are supposed to offer a stable alternative to shares, are not quite as bad as the share market this year. But, by the sober standards of the bond market, they are very bad indeed. The benchmark retail bond fund – the Vanguard Australian Government Bond Index ETF – is down 11 per cent year to date.
As for the sharemarket, the trend is lower, regardless of any one-day bounces we get from time to time. This year so far the ASX is down 12 per cent, Wall Street’s S&P 500 is down by a thumping 25 per cent.
For private investors in Australia – effectively excluded from the stalwarts of big super such as private equity and directly held infrastructure – the obvious alternatives of property and cash also leave a lot to be desired.
Residential property prices are falling, and many leading economists suggest these falls will accelerate early next year.
Cash rates have improved ever so slightly, but there are two caveats here. First, the annualised inflation rate at present is close to 6 per cent. There are no cash or term deposit rates out in the market just now that offer more than annualised inflation – in effect, cash savings are losing money.
Second, despite headline grabbing promotions of bank cash rates near 4 per cent, these are not cash rates as the majority of investors understand them. The reality of accounts that pay anywhere near these levels – especially if they are not for fixed terms – is that the banks insist on tight conditions. Typically, they have minimum monthly deposits or minimum spending on credit cards. These preconditions are surely mislabelling. Banks should be prevented from describing these products as cash rates.
Beyond those asset classes, we are getting into exotic investments. The least exotic may be gold, now more commonly available through index funds.
Gold may – in time – offer a safe haven, but for now it is almost as disappointing as bonds. Over the last year, gold has gone nowhere – it is down 4 per cent over the last 12 months.
So what to do? If you talk to top financial advisers, the majority will not disagree with a single thing you have just read -they just come at it from a different angle.
They – and their more enterprising clients – are waiting for bargains and importantly do not believe the wait may be that long.
Investors can already see the manoeuvring of fund managers who are lifting their cash positions to ride out the storm.
More recently, we can see signs the big funds that managed 10 per cent returns in recent years know they must now quickly reset their sails. Industry super funds such as Aware and Hostplus are pushing their members towards more conservative funds.
Perhaps one of the most telling indicators on our stormy markets is not the rise in put options trading on Wall Street or the price of debt swaps in Europe, but something more predictable. Fund managers are once more promoting the attractions of dollar cost averaging – the practice of constantly investing throughout the year to avoid market volatility. It seems like funds only revive the merits of dollar cost averaging when the bears are in charge.
Top advisers are telling their clients what they always tell them. Don’t panic sell, don’t undo a strategy for a tactic.
Yes, sell your worst stocks and exit your most speculative positions because having more cash on hand to reinvest at lower levels will always make sense.
But share market specialists also suggest value is close to returning on the ASX – and even the US, where the market downturn has been more severe.
Meanwhile, the outlook for house prices may be that falls will worsen, but implicit in that is the cheapest property in some years should appear in 2023.
Yes, it’s tough out there, but now is not the time to bail out.
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