5 tips for investing in uncertain times

Investor anxiety has been heightened recently by the?war in Ukraine and impending rate rises by the Federal Reserve. We view such volatile times as ?a chance to evaluate the resilience of portfolios as well as their potential for long-term returns. As such, we advise investors to maintain a calm stance during the crisis, diversify, consider specific hedges, consider alternatives, and maintain exposure to long-term themes.?

The recent volatility inspired by the dispute over Ukraine and the pace of central bank rate rises has unnerved many investors. Further volatility remains likely as these two issues play out. This expectation is reflected in the VIX index of implied stock volatility, which at 27 is well above the long-term average of around 20 and is consistent with daily swings in the S&P 500 of close to 1.7%.

But in such uncertain times we would offer five tips to ensure investors are positioned for long-term gains:?

1. Stay calm during a crisis.

It is normal to be unnerved by geopolitical crises or the threat of higher interest rates. Historically, however, the greatest danger from both periods comes from exiting risk assets at the height of market panic. Markets are typically more resilient than investors expect, often rebounding swiftly from periods of uncertainty. Take geopolitical risk. Since the attack on Pearl Harbor in 1941, the S&P 500 has been higher three-quarters of the time 12 months after the start of a crisis. Half the time, markets have only taken a month to recover. Equally, while the leadup to Federal Reserve rate hikes can cause volatility, rate hiking cycles have usually been accompanied by strong equity market performance. Since 1983, the S&P 500 gained 5.3% on average in the six months following the first Fed rate increase.

2. Diversify geographically and in terms of assets.

Most geopolitical crises will impact some nations more than others, such as South Korea during North Korea’s missile tests, or Russia and Ukraine during the current crisis. Since you cannot anticipate where the flare-up will happen, we believe maintaining a geographically diverse portfolio is the best basic hedge. Equally, ensuring exposure to assets such as high-quality government bonds has historically helped smooth portfolio returns, as their value generally – though not always - rises during equity sell-offs. Increasingly, with government bond yields still low, hedge funds have become a more popular source of portfolio stability - outperforming stocks in almost every year that equity markets have fallen over the past two decades.

3. Don’t neglect private markets.

Public markets are not the only route to strong returns and portfolio stability. This is especially the case after a period of above-average public market returns. For investors willing to lock up capital for longer, private equity and credit have historically generated higher returns than listed markets, a trend we expect to persist. Private markets also have a low correlation to public markets, offering diversification benefits.

4. Gain exposure to long-term themes.

During periods of market volatility, it can be difficult to look past the issue of the day. For example, the tech-heavy Nasdaq has been particularly affected by rising yields so far in 2022, with the index down close to 15% at the time of writing. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends – such as the rapid growth of digital data or rising cyber threats. At present, we see particular long-term upside for companies involved in artificial intelligence, big data, and cybersecurity, the ABCs of tech, a theme we expect to generate annual earnings per share growth of around 16% over 2020–25 on average.

5. Consider specific hedges.

While government bonds or gold are often considered appealing safe-haven assets during a crisis, there is no one-size-fits-all hedge. Rather, the best hedge depends on the nature of crisis. For example, we have recommended investors consider adding exposure to energy and commodities, given the possible risks to supplies of Russian oil and natural gas. Meanwhile, Ukraine is a material exporter of corn, wheat, and oilseeds. We think broad commodities can be an effective “geopolitical hedge” for portfolios, as well as offering an attractive source of returns in an environment of accelerating growth, persistent inflation, and higher rates. ?

So, we see periods of volatility and uncertainty as a chance to evaluate the resilience of portfolios during a crisis as well as their potential for long-term returns.

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