Let's not confuse the short term with the long term, perhaps risking compromising one's investments. There are at least five reasons why it's still a good time to invest. That's the way it is Roberto Rossignoli, Portfolio Manager of Moneyfarm analyzes the current situation and suggests how to move with your wallet.
If you look at the history of financial markets recent years it cannot be denied that the system has been able to self-regulate, evolve, blunt its limits and guarantee investors a path of constant growth, holding up solidly in the face of major crises such as the great recession of 2008 or the Covid pandemic Rossignoli says. In recent times we have witnessed the end of the expansive phase led by thetechnological innovation, which increased the productivity and compressed i Costs, the resurgence of geopolitical tensions and the slowdown of globalisation. You need to watch these trends closely.
There is the temptation to sell to anticipate a negative phase: but the focus is on beating inflation
In periods of high volatility it is easy to get discouraged and decide to divest part of your capital or try to "beat the market", i.e. sell for anticipate the negative phase, then maybe come back at the moment that is considered "right". These are choices which, while understandable, they are not successful in the long run because the recovery times of the markets are unpredictable and highly variable: if we look at the last four financial crises we notice that it took up to four years to recover. “We believe the best choice is to invest or stay invested for beat an inflation that in 2023 we will not see it fall below 2% in either the United States or Europe, instead of trying to beat the market, so as not to lose the positive returns of the recovery phases” says Rossignoli.
The risk premium remains significant for both equities and bonds
Although liquidity may seem like an attractive alternative today, the diversified approach is the winning one, says Rossignoli. Indeed, historically, multi-asset portfolios take less than 10 months to break even after a period of crisis. “In the next 10 years we expect higher yields than we had budgeted in the past years for most of the asset classes”.
"The shareholder of developed countries is the asset class destined to generate the highest yields, with a rather significant risk premium (5%), driven by dividends and growth of to evaluate expected still strong. But the emerging ones also seem promising to us, above all thanks to prospects in line with historical values as regards exports”.
With long-term inflation expectations remaining anchored, the inflation-linked bonds they should perform as well as their nominal counterparts. As regards the corporate bonds, the prospects are quite good thanks to high yields and rather low expected default rates. The yields of'high yield (stocks investing in companies with lower credit ratings) are only slightly higher than investment grade (stocks investing in companies with better credit ratings). Government obligations of emerging markets record the best expected long-term return of the sub-fund.
Achieve medium-term goals
It is necessary to think about a medium-long term financial planning. Historically, stock markets have experienced many ups and downs. A bear market, by definition, is identified by a fall of 20% or more, while in the case of losses between 10% and 20% we speak of corrections. History shows that corrections are always followed by a rebound, usually resulting in a stronger performance within a year. We often talk about one imminent recession. The recession affects corporate earnings, which in turn translates into negative market performance, however the markets tend to anticipate economic trends. Negative market performance tends to occur in the six months leading up to a recession, and it is during an economic downturn that markets begin to recover.
The era of Great Moderation is not over
Markets have more confidence in capacity of central banks to control inflation of what these have in themselves, says Rossignoli again. "We believe that inflation can be tamed and that the prospect of a new period of economic stability be concrete". With their latest moves, central banks have shown that they are determined to continue to prioritize the fight against inflation, even despite the recent turmoil in the banking system caused by the second most serious bank failure in US history. Powell it was clear: it is not planned for this year no rate cutsIndeed, further tightening of monetary policy could be on the horizon. It is reasonable to expect greater caution from the ECB, but the Frankfurt institute also raised rates (by 50bp) for the sixth consecutive session in mid-March, showing equal determination.
Skyrocketing inflation and the monetary policy put in place to combat it were the main cause of the massive increase in the correlation between risky assets and safe assets in 2022. However, this situation occurs in extraordinary circumstances, is not the rule in the history of financial markets and "we expect a normalization of the correlation in the medium to long term in line with the last 20 years, which also include the global financial crisis of 2008, the Covid pandemic of 2020 and the war in Ukraine"
The green transition has not lost momentum
After the strong growth in 2020 and 2021 both in terms of assets under management and performance, 2022 was a special year for ESG investments. The conflict in Ukraine and soaring inflation posed a challenge to the green transition, and socially responsible funds that did not invest in fossil fuel-related assets generally underperformed traditional investments, as they were not supported by the soaring commodity prices. “However we believe that the challenge to save the planet it will be an increasingly strong catalyst for investments, in the long term there will be an acceleration towards clean energy and this can only be good news for ESG investments” concludes Rossignoli. “The energy crisis has made various governments realize the importance of renewable energy and other energy sources in reducing Russia's dependence on fossil fuels before 2030”
