Aegon’s Head of Portfolio Management, Anthony McDonald, provides an update on the market response to fears that the US could be heading for a recession, and what this may mean for your pension or ISA investments.
What’s happened?
You may have heard about the recent sharp falls in equity (company shares) markets around the world. Global equity markets experienced falls in value on Monday 5 August 2024 as investors became concerned about the strength of the US economy.
We believe the cause for these concerns is due to a series of weaker-than-expected data releases on manufacturing and employment levels being issued last week that showed the US labour market continuing to slow, raising fears that the US economy may be moving towards a recession.
These data releases also coincided with the Bank of Japan increasing interest rates to around 0.25%. Previously, interest rates were kept at near zero, or even lower, to incentivise economic growth. As a result, investors were borrowing the yen cheaply to buy other investments with higher expected returns. But once the interest rate was increased, the yen then rallied against the US dollar, resulting in investors selling these investments to reduce their yen borrowing.
A combination of these factors led to the mass sell-off of the US and Japanese shares, and the subsequent sharp market falls that we saw.
We’ve seen some stability return to the markets this week as other high-profile data releases on the US economy were published which suggested a more positive outlook. This appears to have calmed fears about a sudden economic slowdown.
Should I act?
During these unsettling times it’s important not to panic and consider the current volatility in relation to your long-term investment goals.
A downturn in markets is never pleasant, but while stock market shocks tend to be sharp and painful, they’re usually relatively short-lived as illustrated in the chart below.
For illustrative purposes only. Past performance isn't a reliable guide to future performance. Captial at risk. Chart shows global index MSCI World with initial investment of £10,000. Source: Morningstar Direct. Figures in £s on a net return basis from 1 January 1980 to 31 July 2024.
The market tends to win more than it loses, especially when looking at longer term annualised figures, although there’s of course no guarantee that past performance will reflect future performance.
The current situation may lead to a period of market volatility that could affect your savings/pension investments but making short-term investment decisions may have an impact on longer-term investment goals.
You should speak to a financial adviser if you’re concerned about the impact of market volatility on your long-term savings. If you don’t have a financial adviser, you can find one in your area by visiting MoneyHelper.
How we’re responding
We typically rebalance our funds after large price movements to maintain our asset allocations and realign to risk targets. Price moves as a result of the recent market volatility may result in the rebalancing of some of our portfolios.
We’ll continue to assess the impact of recent events on the fundamental value of equity markets to ensure that we appropriately balance risk and opportunity in line with the long-term investment objectives of each portfolio and, where in the best interests of investors, we’ll make adjustments to our asset allocations.
Our aim is to achieve a balance between risk and reward that is in line with our investors’ expectations over periods of five years or more and we will continue to position the portfolios to do so.
Please read our article on market volatility for more information.
The value of an investment, and any income you take from it, can fall as well as rise and isn’t guaranteed. You could get back less than has been paid in.
Anthony McDonald is manager of Aegon’s Risk-Managed Portfolios.