We take stock of recent market moves and ask whether selloffs in areas like technology provide opportunities for active investors seeking to invest in quality businesses at attractive valuations.
In a turning point in markets there are plenty of opportunities for investors. But it is no easy task to identify those opportunities in the midst of change. We look at what lessons we have learnt and how to invest as events unfold.
Identifying what we know to be true or false, and dealing with the rest
Before we get onto the certainties, it’s worth addressing that this will leave a lot of unknowns. We won’t know when or how the Russian- Ukraine war ends. We won’t know whether we’ll get an economic recession this year or next. Especially in the wake of such a huge change in markets, there will always voices saying “You should wait until…”. But history shows that waiting until after a turning point is the surest way of missing the opportunity. We can make some predictions, but when investing we must reflect that lack of certainty about the future by investing appropriately. We can do this by diversifying our investments, striking the right balance between risk and reward to reflect our circumstances and viewing investment with a longer-term time horizon. We think this is an excellent time to be invested in active managers given they have a flexibility that you don’t get from passive investments.
This was a market bubble
Valuations are important once again
The bubble saw a detachment of the market from fundamentals. The rise of inflation and increase of interest rates has meant that anticipated future profits are less highly valued. So now, after the bubble, in a time of inflation and rising interest rates, it is crucial to ensure that investment is based on those fundamentals. And to be able to calculate valuations the company must have assets and sales and profits and dividends to shareholders. Therefore, we are looking at valuations based on underlying cash assets and cash earnings to determine which companies are attractive opportunities.
Investing is being better rewarded
The rise in interest rates means that investors are finally seeing a positive return on their cash, even if it is still being eroded by inflation. And that means that other investments are having to compete, so we have also seen an increase in bond yields and dividend yields to provide more attractive income returns for investors. We therefore see this as a more attractive time for long-term investment.