Global sell-off in context plus funds for capital preservation

Having enjoyed a seemingly relentless rise, the US stock market suffered its worst one-day fall for many months last week, causing a ripple effect across global markets: Asia, Europe and UK stock markets all suffered big losses, and the FTSE 100 ended the week just below 7,000 – more than 10% below its peak in May.

But what caused the markets to take a turn for the worse?

US President Donald Trump was quick to blame the US central bank for the falls, saying: “The Fed is going loco. I do not know what their problem is. They are raising interest rates and it is ridiculous.”

His comments came after Jerome Powell, the Federal Reserve Chair, indicated interest rates would continue to rise further in coming months as “the ultra low levels, which were required to get the economy out of the Great Recession after the global financial crisis, are no longer necessary.”

The US economy is indeed in good health. Unemployment is now as low as it was in the 1960s. But this has contributed to fears that wage growth could lead to higher inflation and, in turn, mean that interest rates could rise at a faster pace than previously expected. This scenario usually ends up triggering a recession in the US, which would be felt on a global scale. So markets are worrying that the Fed will make a policy mistake.

Wobble without a cause

Karen Ward, Chief Market Strategist at JP Morgan is not certain Fed policy was behind the market falls and described it as “a wobble without a cause.” She said that the interest rate rises were due to economic strength. “Had it been an inflation scare or a dramatic reassessment of the outlook for Federal Reserve policy, we may have had a bit more sympathy for the idea that the central bank was going to have to think sooner rather than later about ending the economic cycle,” she commented. “But the fact that real rates are rising tells us bond investors are less worried about the long-term outlook for US growth. Hardly a reason for equity investors to run for cover.”

Donald Trump himself is also the cause of another factor that has been troubling investors: trade wars. So was this the reason for market falls? Investors have been getting gradually more and more concerned about what the US-China trade war means for companies and economies at a time when global growth appears to be slowing. China’s numbers have been getting steadily worse over past months, leading to concerns that global demand is about to fall significantly. But again, there was no clear escalation of tensions before the drops.

What action should investors do?

While market falls can be worrying, the best course of action generally is not to panic: the danger is that you could miss out on the market rebounding. This was illustrated this week, when the US stock market subsequently enjoyed its best single day gains since March, with the Dow Jones Industrial Index rising some 547 points.

At FundCalibre, we are firmly of the opinion that, if you were going to invest for your long term, you should stick to your investment goals and ride out the ups and downs of stock markets.

Some investors may even like to take advantage of market falls by topping up investments at cheaper prices.

If you are worried that markets have reached the top of their cycle, then you could consider making sure your portfolio includes some funds that aim to preserve capital.

Here are four funds to consider:

BlackRock UK Absolute Alpha

Managers Nick and Nigel, aim to make money when share prices fall as well as when they rise. They invest for the long term in companies they think will do well and use ‘contracts for differences’ to ‘short’ stocks they think will do badly.

Smith & Williamson Enterprise

The managers of this fund develop an investment thesis about specific sectors and industries and then identify companies that are likely to outperform or underperform a theme that has been identified. Like the BlackRock fund they too look to make money from falling as well as rising stock prices.

Church House Tenax Absolute Return Strategies

In contrast, this multi-asset fund invests in lowly-correlated assets to make sure the portfolio is diversified in investments that don’t all move in the same direction. The most important factor in the investment process is avoiding loss.

Brooks Macdonald Defensive Capital

This is another multi-asset fund. A key feature is that underlying investments often do not require market growth to do well. The managers seek to create a portfolio whose performance is more predictable, by investing in assets that have fixed returns.

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.