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Heading into the final straight of 2018, with the final quarter of the year merely a few trading sessions, it is important for market participants across all the capital markets spectrum, asset managers, advisors and investors alike, such as economists, analysts and the majority working in the financial services sector and market practitioners alike, to come to terms with what we have been faced with this year.
Who would have thought that the US would have been the best performing region by the end of September (both US equities and US High Yield)? Did anyone anticipate the magnitude of the weakness in EM assets in the same we have registered so far this year? Was the profit-taking bouts in European High Yield, notably in the financial sector, anticipated/expected by the market? Was the writing on the wall for the performance of global capital markets so far this year or have we been taken by surprise many a times?
Uncertainty, both on the positive side of things as well as on the downside, is always present in the markets. It is what drives prices, sentiment. If everything was certain, we would either have a market crash or a sharp rally as everyone would be, as we put it, on the same side of the trade. Uncertainty is what drives direction – it’s the probability that an event would occur given the level of certainty (backward looking data) coupled with uncertainty (expectations, projections, forecasts and forward looking data).
This year, volatility and larger swings in asset prices were registered as the level of uncertainty increased. And this was not brought about by wrong calls, bad market judgement, or any excessive market-related swings which we have become accustomed to. Uncertainty was of the highest order as there were a number of external market forces, beyond everyone, which were impossible to anticipate let alone quantify, which had a massive impact on asset prices, a typical example of which was the infamous on going trade wars, which pretty much characterised (and continues to characterise) the better part of 2018. The effect of which impacted asset classes across all the spectrum.
When looking at market performance, total returns, price returns, and historical charts of asset prices – it is important to view them and interpret them within the context of the markets we continue to face on a day to day basis, and not in isolation. Coming to terms of where we are coming from, where we are at, and more importantly (and this is the hardest part) where we are heading will give investors a clearer picture of what to expect from their investments and interpret performance, so as to position their portfolio of investments commensurately with risk profiles and market outlook.
“Take a step back. Analyse the situation. Act rationally but use a methodological thought process to help you in your assessment in the current scenario. Do not rush. Invest diligently.”
Priceless words of advice from my first mentor on the job, which I continue to hold dearly to me till this very day.
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