We have had our work cut out for us recently. We have had to get used to a new style of very visible leadership from the US which has undoubtedly changed the narrative around a number of key geopolitical issues.
Primarily for investors, the talk of tariffs (whether fully implemented or not) moved the dial in expectations for growth in a hereto globally inter-connected world. But the market, as it so frequently does, has been able to digest this news pretty quickly and revert back to an expectation of growth perhaps “in spite of” what governments do, as opposed to “because of” what governments do.
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Added to this, the spectre of war across multiple continents has raised its head again. The recent escalation in the Middle East initially caused quite the oil price spike, which soon abated as markets became more reasonable on the potential for full scale escalation and what this would mean for both oil supply and transit. At the time of writing, while the range of scenarios playing out is relatively wide, the market is showing signs of optimism despite recent events.
They often say that markets are driven by both data and sentiment, with the long-term expected returns squarely rooted in the “facts of data” and short-term movements more rooted in sentiment.
At the moment the data set looks surprisingly robust. Multiple central banks globally have either cut central interest rates or held them steady, this strategy being based in a belief that geopolitical events are either negative for growth or positive for inflation.
However, the feeling on the street “feels” different to the economic data – try to get a booking in your favourite restaurant on a Saturday night this weekend and see how you fare.
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So, should investors be cautious or optimistic? For long-term investors, it is hard to imagine that the geopolitical events of today will have a profound impact on the performance of global companies in 10 years’ time. Indeed, if you are a believer in the advancement of human development and our ability to evolve, amend and reshape the goods and services which we consume, then again for longer-term investors, the present noise in the market become less relevant.
But is it times like this which really reinforce the importance of diversifying asset exposure. If markets gravitate away from macro fundamentals and towards geopolitical or fiscal risks, balancing risk across different asset class mixes is a strategic necessity. Put simply: don’t put all of your eggs in one basket.
Diversification by asset class, industry and geography will likely have a positive impact when volatility spikes in one corner of the market – a potential safe haven when clarity is in short supply.
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Recent market volatility is understandably unsettling for many investors. Periods of uncertainty often heighten caution, leading some to consider shying away from risk. However, assisting clients to step back, revisit their goals, and maintain perspective allows them to avoid reactive decisions and remain aligned with their long-term plans.
So, should investors be optimistic? Well, long-term investors who have clear objectives and a strategy which diversifies risk have every right to be optimistic.
Remember that history has ups and downs: some of the best days of market performance follow the worst. For those who have the composure to see through volatility, history shows they have been compensated for that.
This is because what drives long-term market performance is long-term economic growth, human ingenuity and technological progress. The wheels of growth don’t just stop turning overnight.
Jonathan Sloan is regional director in Scotland, Newcastle and Northern Ireland for Barclays Private Bank & Wealth Management.
