How to act when there is unrest in the financial markets?

Whether you are saving for your pension, a new car, a cash contribution for an apartment or for having a buffer for unpredictable expenses, it can be beneficial to have the money placed on the stock exchange via funds and shares. The savings account is currently an unattractive alternative with low interest rates and inflation looming on the horizon. In January 2022, Swedish inflation was 3.9%, which means that your purchasing power will decrease by 3.9% per year. Any return on your savings below that rate means a reduction in your purchasing power. What are the alternatives then if not the stock exchanges?

Time in market beats timing the market

Before you invest your money, it is important to ask yourself when you need them, will you buy a car within a year? Is the apartment purchase only relevant in five years? The time horizon is decisive for what risk you can be prepared to expose the money to. A common rule of thumb is that money you need within 3-5 years should not be exposed to the stock market in the same way as say, your pension capital. In a situation where you know that the money will be used within 1-2 years, inflation may be the price you need to pay in order not to expose the capital to the risk that the stock market entails.

If you, like many others, have more long-term savings and find it fun and interesting to follow the financial markets, it can be a point to place your capital where they get the best return for the moment. Of course, it is difficult (some say impossible) to pinpoint the exact right opportunity to buy or sell a stock or fund and most of a saver is guaranteed to be best off in long-term, well-diversified low-fund index funds. But for the part of your savings that you may be a little more active with, where you buy and sell shares you believe in and exchange funds to get that little spice in the portfolio. How to act there?

How does Augere act?

Since the rise in equities during the month of December, we have focused on having access to “dry gunpowder” and being able to act in the event of opportunities arising in a volatile market. We see opportunities to position ourselves correctly in both ups and downs by identifying the strongest and weakest sectors. In recent days, we have noted that the selling pressure in the major US indices has been less than at the decline earlier in January. Which in turn led to a bounce upwards at the end of last week despite the war in Ukraine. Our assessment is that it should only be a matter of time before the US stock market breaks down through important levels, which could potentially open the door for a fall of up to 8-10%. Thus, we still see the downside in the near future, which keeps us from increasing the risk, instead we have liquid funds available to be able to buy the shares we see as winners in the next 1-2 years.

For those of you who trade very actively with shares, the strong price movements make it even more important to review your risk management and, above all, to follow a clear strategy for your trading. What do you do if the stock market falls another -8% in 4-5 weeks? Are you selling in a panic? In 2021, more than $ 1,000 billion flowed into global equity funds, which is more than the previous 19 years combined. The rises in shares since March 2020 have meant that your neighbor, their cat sitter, the taxi driver and her aunt have bought shares like never before. As the central banks do not learn to raise interest rates as the market has so far priced in and economic growth is likely to have difficulty with continued high energy costs, we believe that this is the beginning of a larger downturn. The importance of having a plan and not panicking is greater than ever.

But what should I invest in then?

If we are right in our forecast that the stock markets will fall further, it may prove to be a good buying position in growth stocks more defensive companies, such companies that provide services and goods that will be needed, regardless of where in the business cycle we are. On the other hand, we stay away from so-called "Value" shares and bank shares, companies in those sectors will not go as well in our opinion and there we prefer a so-called "risk-off". Take home any profits you have managed to create in recent years and allocate part of your "active" portfolio to monthly savings in index funds or investment companies.

Another important aspect of today's market is how it is affected by the terrible war in Ukraine which has led to a veritable raw material chaos with higher prices in assets such as wheat, gas, petrol etc. Europe imports almost 60% of its energy resources. Russia is Europe's largest energy supplier, providing about 45%. Nordstream 2 was completed not so long ago to be able to move even more natural gas from Russia to Germany, a project that is now on ice (and no one knows if it will be taken up again). Russia is also the largest exporter of wheat in the world with about 39 million tonnes annually. In this context, the United States is the world's second largest exporter with 27 million tonnes. Given our dependence on raw materials from Russia, it will be interesting to see how the United States and Europe handle them in the sanctions that are now being introduced. Europe, for example, can access oil, wheat and potassium from other sources, but there is virtually no one who can replace natural gas. One guess is that the security situation in Europe leads to greater investment in renewable energy sources and a commitment by EU leaders to get rid of dependence on Russian gas. Regardless of the exact impact of the sanctions, fear and uncertainty have been driving up the prices of these commodities for a long time.

If you are unsure of which individual shares can be winners, you could focus on funds that are invested in renewable energy, as well as the defense and security industry. As an illustration of the crazy times we live in, voices have been raised to include arms manufacturers in the ESG index to give them access to capital flows. Who could have guessed that a year ago?