Sharemarket indices across the globe, led by the US, are correcting. This is a normal and expected cyclic adjustment. Following a record period of low bond yields, interest rates are on the rise. The historically low rates have been stimulatory for the major world economies and the move to more normal rates, led by the US, is a response to increased economic growth, employment growth and early signs of a more normal inflationary environment ahead. Conditions across the globe vary with the strongest signs coming out of the US stimulated further by recent company tax cuts.
This healthy correction has been expected for some time. Global economic growth is on the rise with most economists optimistic about the year ahead. Economic fundamentals remain sound in the US and in Australia. The Eurozone lags the US in terms of moving to a more normalised monetary policy but is heading in the same direction.
This is a time when higher risk stocks and those stocks and sectors susceptible to interest rates rises will be more affected. This includes companies with higher debt levels. The property sector, banks, technology and growth companies will be more affected.
Investment funds holding interest bearing investments including bonds and hybrid securities are negatively affected by interest rate rises. Many managers have been carefully managing these portfolios reducing exposure to longer dated bonds and increasing cash and shorter-term holdings.
The rising tide has lifted all boats, but this is now a time when stock selection and active portfolio management become even more important. It could be a bumpy ride in the year ahead. Timing in and out of these movements is near impossible. A considered, disciplined approach is the best defence. Panic selling or following the herd can lead to significant long term losses and erosion of wealth.
If you are concerned about your portfolio call us. We are happy to review your investments and talk through your concerns.
Andrew Condell 2/2018
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