There is no denying it, we live in turbulent times. The Russian invasion of Ukraine, increasing prices, and issues with energy supply – all of these things are causing uncertainty about our future. As a result, the global stock markets have taken a hit. This market update will shed some light on the current developments and provide you with relevant insights to help you better understand the overall market situation and how this could impact your portfolio.
In this article, we’ll explain:
- What’s going on in the markets right now?
- How is this market downturn different to past recessions?
- What does this mean for you and your Inyova investment?
- How is Inyova reacting to this situation?
- Is there any good news?
Before we get into the nitty-gritty: Historical data shows that after every crisis there was an upturn, and staying invested is the best thing that you can do to build long-term wealth. So, “keep calm and carry on” is a great mantra for these times.
What’s going on in the stock and bond markets right now?
The ongoing invasion of Ukraine and its spill-over effects into the rest of Europe – like the sabotage of the Nord Stream pipelines – are making an already tenuous situation even less certain. As a result, the markets remain unstable and continue to react with some ups, but mostly downs.
The inflation rate
The inflation rate continues to climb, which means that the money we all have in our bank accounts loses value and we can afford fewer things. In Germany, for example, the inflation rate has reached a record level of 10 % – rates this high have not been seen since World War II. Because of this, many people are able to buy less and have to focus more on purchasing the essential items they need, rather than purchasing name-brand goods they might switch to store-branded items for things like personal care or food. When people buy fewer things, the companies producing these things in turn make less money and their stock price may go down as a result.
Bonds are also affected by the overall market situation. The high inflation rates are forcing central banks across the world to increase interest rates, which affects the prices of bonds. In October 2022, German and US 10 year government bond yields reached their highest levels since 10 years at 2 % and 4 % respectively.
But, that’s not entirely good news because if interest rates rise, the value of bonds falls. Let’s take a look at this example:
- You bought a bond a year ago at a 1 % interest rate over 10 years
- During this year the 10 year interest rate for this bond has now increased to 3 %
- So now your bond is still locked in at the 1 % interest rate for the next 9 years, while other bonds are offering 3 % interest rates. As a result, the bond you own is now less valuable because it pays less interest – hence, its price has decreased.
The upside is, that the bonds in your portfolio are constantly rebalanced – so any money that might become available in your bond portfolio is now invested at a higher interest rate.
How is this market downturn different to past recessions?
Market downturns are part of the normal swings in the market. In fact, in the past 75 years, the world has seen 11 recessions. Historically, after every recession, we saw an upturn as the economy recovers. In the long run, this downturn is nothing to worry about. In the short run, things are likely to continue to stay bumpy.
The main difference between this crisis and past downturns is the fact that we are facing overlapping issues – an overall economic slowdown after the pandemic as well as the war – and therefore, stocks and bonds are both losing value simultaneously. That means the traditional diversification strategy, which includes bonds as a way to even out volatile stock markets, is currently less effective.
What does this mean for you and your Inyova investment?
There is no doubt: the global market turmoil is affecting your portfolio. The stock part of your Inyova investment is experiencing the same volatility as global markets. Your green bonds are also affected by the overall interest rate increases and price declines. Although your Inyova portfolio is well diversified, the volatility and downturns that we see in the markets are also reflected in your investment.
How is Inyova reacting to this situation?
But not to worry – your Inyova portfolio is designed to withstand these short-term fluctuations. First off, our investment office is constantly monitoring your portfolio. We’re always checking the financial “health” of the companies in your portfolio to see if they still meet our rigorous requirements. If they don’t, we will remove them or replace them with a new company. Secondly, our investment approach is focused on the long term. We make sure that your portfolio is well diversified and contains stocks and bonds that span numerous sectors, regions, currencies and countries – as well as include both large, mid-sized and smaller companies.
In August, we completely updated our investment approach in order to align with the new market environment. We’ve already taken into account that we might enter a longer recession or might have high interest rates for a longer period of time. Therefore, your portfolio is well set-up to weather the storm of the coming months.
Is there any good news?
Yes! We can’t say it enough – historically, after every crisis, there was an upturn. In fact, since the global financial crisis in 2008, stock markets have gone up by more than 200 %. So, hold on to your hats – we’re probably in for a bumpy ride. Please note: The past performance of financial markets and instruments is never an indicator of future performance.