Things are turning around

The one thing we can all agree on, is that whatever you are certain will happen in financial markets, will not. Human behaviour is unpredictable. How many times have you found yourself determined to do something, just to change your mind in a second after reading, seeing, hearing or smelling something else? Exactly the same thing happens in financial markets and the shorter the time span, the more unpredictable the outcome. That is why one of the cornerstones of investing is to stay the course when volatility rears its ugly head.

It is a fact that most investors, even the clever ones, buy at the top and sell at the bottom, causing irreparable damage to their longer-term returns. We have to understand that investments have cycles. There will be a time when one asset class will go down when another goes up and vice versa. Currently we are seeing some changes in very important financial indicators that will impact your investment returns going forward.

Inflation is rolling over in the USA, hinting at a possible slowing of interest rate hikes. China is taking a more moderate stance on their Covid-19 policy, opening up the door for better economic participation and we are also seeing the US dollar weakening, thus boosting the potential returns for emerging markets. Investors are always looking at the future potential of an asset class and currently the question they are asking is what will happen to company earnings when we go into a recession; a circumstance usually causing company earnings to start to falter.

One potential outcome is that the recession will be milder than feared and that the quality, non-cyclical companies will perform relatively well, boosting the price of their shares. Another outcome might be a deeper recession, dragging share prices down again. So, due to markets’ track record of being unpredictable, we just do not know, but one can be quite confident that some time over the next year or two, quality companies that generate strong cash flows will trade back at record highs.

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