Fisher Investments UK

Investments in the Financials sector have performed better than the broader equity market in 2022, but some equities in the space remain below price levels leading into the Great Financial Crisis from 2007-2009.[i] Over a decade of lacklustre performance has some investors wondering how to invest in the sector and whether its recent outperformance can continue. In this article, Fisher Investments UK discusses the basics of the Financials sector, what’s impacted its performance in recent years and factors to consider if you are thinking of making a change in your portfolio. The Financial Sector’s Decline The Financial sector has long been a sizeable part of the equity market, but its prominence has waned following the Great Financial Crisis.

What is a reasonable equity market return to expect in a given year? 5%? 10%? 20%? Based on Fisher Investments UK’s reviews of financial publications and opinions, many investors cite figures ranging from high single digits to low double digits, based on stocks’ long-term historical average.[i] Whilst the logic behind that thinking is understandable, investors don’t benefit from using averages in that manner, in our view. Let us explain. Based on Fisher Investments UK’s reviews of popular market topics, many people imply the average is the typical result. If something is outside that average, then it is atypical – in either a good or bad way. For instance, we have observed many analysts treating stocks’ historical average return as a guide for future returns.

Rising inflation has grabbed headlines across the globe over the past year, reaching multi-decade highs in many countries in the past several months. From petrol prices to food and travel, inflation has impacted nearly every corner of consumers’ lives. With inflation at such high levels, many people are asking what – if anything – can be done to tame these sizeable price increases. In this article, Fisher Investments UK looks at where inflation is today, where it could go from here and potential benefits of equity ownership during inflationary periods. Where is inflation today? Inflation is a normal economic phenomenon. In fact, central banks around the world typically target a small amount of inflation each year – usually around 2%.

Based on Fisher Investments UK’s reviews of market history, we think investing globally is sensible for many investors. However, global investing can introduce a unique feature in owning securities from abroad: currency skew. In our view, investors may benefit by understanding its effect on international equity returns. Currency skew describes the difference in returns on equities you buy denominated in currencies other than your home country’s and those applying to you after conversion. Thanks to modern financial innovations, European investors seeking to purchase foreign companies – like US listings – usually don’t have to move money to an American account, convert their funds to dollars and buy equities.

Fisher Investments UK’s research shows markets look forward – but not too close or far ahead. What does this mean in practise? We think a look at Energy sector performance over the past couple years – and what commentators we follow said about its prospects – may prove enlightening. We have found the next 3 to 30 months or so is the timeframe equities generally focus on most. Why? We think markets are efficient discounters of widely known information. Events likely to occur within the next three months – be it corporate earnings releases, economic data, political developments, etc. – get heaps of attention in advance.

What drives markets? In the short term, financial commentators we follow often cite a broad array of different headline news stories. According to Fisher Investments UK’s research, though, markets’ longer-term, more material moves hinge on surprise – the gap between reality and expectations. What does that mean in practise and how can investors use this framework to their advantage? Based on our analysis, stocks concentrate on probable economic conditions over the next 3 to 30 months or so, meaning backward-looking data have little effect on markets beyond a possible short-term sentiment impact.

Labour market figures are among the most widely watched economic data in financial publications Fisher Investments UK’s analysts follow. However, jobs are lagging economic indicators – limiting their use for investors, in our view. In our experience, many investors care about labour market data because of their implications at a personal level. Jobs represent people’s livelihoods and ability to take care of themselves and loved ones financially, and there are important sociological impacts from unemployment. But more relevant to investors, we have found many can’t imagine how an economy can grow when unemployment is high and rising – after all, consumer spending is vital in most developed economies.

In Fisher Investments UK’s experience, investors often treat equity sectors as monoliths – i.e. as if all companies within a sector will behave the same. For example, giant semiconductor firms’ moves will mirror the entire, broad Technology sector’s, or Pharmaceuticals determines the Health Care sector’s prospects. But Fisher Investments UK’s research analysts have found reality is more nuanced – as we will show using the Financials sector. Understanding industries’ unique characteristics can help investors position within sectors for the conditions they expect, in our view. Financials are the second-largest sector globally, at 13.7% of the MSCI World Index by market capitalisation.

Whenever the US Federal Reserve (the Fed) – the central bank of the United States – appears to be raising or lowering interest rates, investors invoke a common phrase: “Don’t fight the Fed”. The premise behind this saying is an investor belief that when the Fed (or any central bank) raises interest rates, the move hurts equities. Conversely, equities benefit when a central bank lowers rates. The saying implies investors are foolish to sell equities when a central bank is cutting rates or to buy equities when rates are rising.

What will the world look like in 2050? Some trends are easy to forecast – like demographics. Based on birth-rate trends and life expectancies, the UN projects the Earth’s population will top 9.7 billion by then.[i] Sociologists who write in publications we follow foresee the vast majority of that population living in urban areas, theoretically requiring a massive increase in electricity generation and other infrastructure. Many demographers we read also see most of that population increase happening in the Southern Hemisphere, with ageing (and eventually shrinking) populations in the north. These predictions all may be interesting from an academic perspective, but, for investors, Fisher Investments UK thinks they are of little use.

Note: Fisher Investments UK does not make individual security buy and sell recommendations. Any reference to a specific security in the below is solely made to help illustrate a broader theme we wish to highlight. Nothing in the discussion should be construed as a recommendation to take any action with respect to the companies mentioned. One of the most popular topics amongst financial publications Fisher Investments UK’s parent company, Fisher Investments’, research analysts follow: what is the next big investment opportunity? There are seemingly abundant trends featuring potentially promising, high-growth investments, including artificial intelligence, cutting-edge pharmaceuticals and rapidly expanding developing economies.

If you’ve taken the important step to improve your financial life by setting goals, establishing a budget and developing a robust, long-term financial plan, you’re already ahead of many people. But, your family’s financial plan could use some regular care and maintenance. You should review some aspects of your financial life at least once a year to determine if you’re still on the path to reach your goals, or if you need a slight course correction. By scheduling a regular assessment of your financial life, you reduce the risk of only reviewing your situation and making financial decisions after things have gone wrong, which could lead to emotionally charged choices that could hamper your chances of reaching your long-term financial goals.

Globally, corporate and sovereign debt securities’ yields are historically low—even negative in some countries—hurting fixed interest returns.[i] Furthermore, Fisher Investments UK finds many financial commentators warn those rates are about to rise, and, since yields and debt security prices move inversely, that means investors get little yield for taking the risk of declining prices. That has many commentators in publications we follow asking: Why hold them at all? In our view, fixed interest’s primary purpose in portfolios is to dampen portfolio volatility to mitigate swings for those needing to draw cash flow.

Terrorism is a real, ever-present risk in the modern world. The recent twentieth anniversary of the 9/11 terrorist attacks reminds us of the tragic human toll and devastating impact to lives, livelihoods and property. While the prospect of a terrorist attack can be emotional and frightening, Fisher Investments UK believes the historical relationship between terrorism and equity markets offers valuable lessons for long-term investors. In particular, the past 20 years have shown that acts of terrorism alone don’t seem to cause lasting market declines. In our view, this is due to equity markets’ ability to focus uniquely on the economic implications of attacks, measure the economic disruption and efficiently price the world’s economic future.

When considering investment risks, in our experience, many investors focus on market volatility (asset price fluctuations)—especially negative swings. Comfort with volatility is indeed an important consideration, in our view. For investors with short-term time horizons—the length of time you need your money to work—a high likelihood of volatility could work against your financial goals. Even for long-term investors, comfort with volatility is key, in our view, as sharp volatility could prompt less disciplined investors to trade at inopportune times. But defining risk as volatility exclusively is too narrow a focus, in Fisher Investments UK’s view—a focus potentially increasing other kinds of investment risk.

Last year, central banks around the world employed quantitative easing (QE) policies to stimulate economic activity following widespread COVID-related economic lockdowns. While these measures improved investor sentiment, QE may not be as helpful to the global economy as central banks intended. The theory goes that QE encourages lending by lowering long-term interest rates, thereby reducing borrowing costs for businesses and consumers. But Fisher Investments UK believes QE may actually be more of an economic and investment headwind than tailwind. In this article, we’ll discuss what QE is, how it actually works in practice and what it means for investors today. What is QE and why do central bankers use it?

Since the onset of the COVID pandemic, equity investing has been a wild ride. 2020 featured the fastest-ever bear market (a fundamentally driven downturn surpassing approximately -20%) and a similarly swift recovery. As the year went on, investors clamored for big-name initial public offerings (IPOs) and IPOs’ in-vogue cousins, special purpose acquisition companies (SPACs). Top that all off with early 2021’s meme-stock mania and it may seem like the equity market is more volatile now than ever. However, a look at history suggests otherwise. Fisher Investments UK believes long-term investors are better off taking a long-term perspective on volatility and refraining from projecting recent market volatility into the future.

Developed nations’ consumer price indexes (CPI, a government-produced measure that tracks price trends) rose sharply in 2021’s first half, especially in early reopening countries like America.[i] That has stirred concerns faster inflation—i.e. prices rising across the economy—is here to stay, amongst financial publications Fisher Investments UK’s research analysts follow. Some consumers’ personal experience may even exaggerate price changes, making them question CPIs’ accuracy. However, as we will explain, CPIs are quite unlikely to closely reflect your personal cost of living—a distinction worth keeping in mind for investors, in our view. CPIs aim to measure the change in prices in a given area over time.

A rapid rebound in crude oil prices since last April, the Organization of the Petroleum Exporting Countries (OPEC) cartel’s shifting production plans, Iran’s potential return as a major global supplier—several big oil developments have made headlines recently. That doesn’t surprise us. Events expected to swing oil prices up or down usually spark much attention amongst financial commentators we follow. When prices jump, like they have over the past year, many analysts warn higher energy costs create headwinds for consumers and businesses.[i] In Fisher Investments UK’s view, this is backwards thinking. Our research shows the economy drives oil prices more than oil prices drive the economy. Oil prices can affect the broader economy.

After a challenging 2020, vaccine optimism has shown many financial analysts we follow a light at the end of the tunnel—and they have raised their economic and equity market forecasts accordingly. Many now envision an increasingly bright future, seeing the strong equity market returns over the past 12 months as only the beginning to a big, long-lived upturn—underpinned by a robust economic recovery. Fisher Investments UK agrees in one respect: Optimism about 2021 is warranted today. But we think maintaining rational market-return expectations is critical—especially if sentiment warms further and evolves into full-fledged euphoria, which can lead investors to take on excess risk that may not match their personal goals or needs.