Market uncertainty can create investment opportunity: Staying invested through it

Last week, US President Trump announced sweeping tariffs of 10% on imports from all countries, with additional reciprocal tariffs on specific nations. For instance, China faces a 104% tariff (the existing 20%, followed by 34% followed by a further 50%), Japan 24%, the European Union 20%, UK 10%, India 26%, Vietnam 46%, Taiwan 32% and South Africa 30%. These tariffs are set to go into effect on Wednesday, 9 April 2025.

Global stock markets reacted negatively to the tariffs. The S&P 500 had its worst week since June 2022 and has had six negative weeks over the past seven. Bond markets rallied, with yields on US Treasuries and UK Gilts falling as investors sought safe-haven assets.

The tech-heavy Nasdaq has fallen by 21% since the start of the year and down 12% in USD over the past week. The S&P 500 is down 12% the last week and 15% YTD, closely matched by the Dow Jones Industrial Average. Over the past week we have seen global equity markets tumble – the UK, French, German and Japanese markets are all down between 7% - 10% respectively. South African equity markets, having held up reasonably on Thursday last week are also down around 10%. The Rand has weakened significantly to R19.66 to the USD (by around 7% this year). The Rand has further been weakened due to jitters around the National Budget and the continuation of the GNU.

The instinctive reaction of investors during periods of market turbulence is often marked by heightened anxiety, accompanied by a sense of panic and confusion. However, investment history reveals that such times of uncertainty frequently present remarkable opportunities for astute investors. Behavioural finance underscores that a significant number of investors tend to become apprehensive during market sell-offs, opting to liquidate their equity holdings in favour of fixed income or cash assets. Unfortunately, these decisions are typically executed at the low points of equity markets, leading investors to repurchase equities at a later stage when prices have already escalated. This pattern of behaviour is a primary contributor to the erosion of investment returns over the long-term. Reflecting on past events, it becomes evident that maintaining composure and a long-term perspective can be immensely beneficial for investors.

The chart below shows returns for a “global balanced portfolio” of 60% equities and 40% fixed income. It looks at the 1 and 3 year returns after a major market sell off.

Staying invested through uncertainty

Source: Bloomberg.

The chart above highlights how a diversified 60/40 portfolio of stocks and bonds has historically outperformed cash following major economic and geopolitical shocks. When assessing the 10 significant market shocks - including the Gulf War, 9/11, the Global Financial Crissi, Brexit, and Covid-19 - markets outperformed cash 80% of the time over a one-year horizon and 100% of the time over three years.

Key takeaways for investors:

• Sticking to one’s long-term investment objectives: In the 12 months after these shocks, investors on average achieved around 9% return in USD, and over a 36-month period over 20% annualised USD return.  
• Benefits of diversification: Exposure across asset classes, regions, and styles helps implement tactical views effectively.
• Time in the market matters: Markets recover, so it’s crucial for clients to stay invested rather than react to short-term volatility.
• Volatility creates opportunity: Investors, instead of redeeming their investments should consider deploying capital strategically into better priced investment opportunities. Valuations matter and are the main driver of future returns.

Market volatility is to be expected

Source: Bloomberg. Data as at 31 December 2024. Returns are based on price index only and do not include dividends. Intra year drops refer to the largest market drops from a peak to a trough during the year.

Market swings are without a doubt uncomfortable and cause much angst. However, volatility when it comes to equity markets is quite normal, and despite the ups and downs, the market’s long-term trajectory is a positive and upward trending line.

The chart above shows the annual performance of the S&P 500 since 1980 (dark green bars). While the market has experienced intra-year declines (on average ~14% (purple dots)), it has still delivered an average annual return of 11% over the long-term - a solid figure, showing the resilience and growth potential of the market over time. Notably, even in extreme downturns like Covid-19 in 2020 (a 34% intra-year drop), the market ended the year with strong gains (+16%).

Key takeaways for investors:

• Market pullbacks are common: The market will have its rough patches - there’s no avoiding that but these are often followed by recoveries. These recoveries can often occur rapidly, making it impossible to try and time the market consistently.
• Approximately 75% of the calendar years ended positive: Despite temporary declines during the 12-month period, equity markets recover.
• Long-term investors who stay the course are often rewarded

For investors with large cash balances, current market volatility, as well as the expected volatility over the next few months, will possibly provide several opportunities to invest at much better valuations than at other times in the recent past. It is often when it feels the most uncomfortable, with many investors anxious and selling (causing prices to drop often below their net asset value), that astute investors top up their investments. This can result in enhanced returns into the future.

A long-term investment approach, coupled with diversification, remains the best way to navigate uncertainty.