Looking the bear in the face

Private and commercial banking firm Arbuthnot Latham offers its take on how investors can deal with the bear market. Report by Harriet O'Brien.

According to Arbuthnot Latham internet searches for “interest rates” are up 243 per cent since the start of June this year, while searches for phrases such as “ways to save” and “should I be investing?” are up by 125 per cent and 85 per cent respectively.

US stocks entered bear market territory in mid June, with the root causes widely acknowledged as ranging from the impact of the global pandemic to the Russian invasion of Ukraine. While the reasons may be quick to understand, the crucial question for investors is how long the bear market will last.

“Forecasting the duration of bear markets is notoriously difficult,” says Eren Osman, Managing Director, Wealth Management at Arbuthnot Latham. “But historically they are much shorter-lived than bull markets. Currently, we remain cautious on equities as inflationary impulses (especially in Europe and the UK) are skewed to the upside. Furthermore, company earnings are vulnerable in the current weak economic environment, which may bode poorly for equities.”

He adds that research at Arbuthnot Latham “suggests that markets will recover once market participants have confirmation of inflation rolling over, and clarity on the low point in economic growth. Central bank policy will be key for markets, and signs of a dovish pivot, particularly from the US Federal Reserve, will support investor confidence.”

In the meantime what can investors do to protect their capital? Arbuthnot Latham offers five tips.

Firstly a review of cashflow is important. Investors need to be keenly aware of their sources of income and of what assets they have – and in particular what purposes the assets serve and when access to them will be needed. By mapping out planned income and expenditure, investors can identify opportunities for longer-term planning. If there are assets that are not needed for five years or more, investing will help grow them with a view to beating cash returns. 

Secondly, pay attention to cash rates. Everyone needs cash  ̶  the amount required, and for how long ,will of course vary according to personal circumstances. Savings rates are higher than they have been for decades and the best are found in fixed-term deposits, but in a rising interest rate environment, investors will need to decide for how long they want to fix. 

Laddering is an attractive option: if investors believe that interest rates might increase over the next 12 months and that more attractive rates are yet to come, they could spread their money over fixed-term deposits over different periods of time and interest rates. This allows regular access to investments on each maturity, 

Arbuthnot Latham’s third tip is to take steps to diversify investments to reduce exposure to risk. If one asset class is performing badly, others may stay the course. By investing in a mixed asset portfolio, investors have exposure to underlying investments which react differently to external factors. Consider assets across a wide range: shares, government and corporate bonds, commodities  ̶  such as precious metals, oils or crops  ̶  commercial property, hedge funds and foreign exchange. Over time, diversification mitigates short-term volatility by spreading a portfolio across different asset classes and strategies, while active management allows investors to benefit from short-term market opportunities. 

Tax efficiency is the fourth major consideration. Investing in tax-efficient vehicles, such as ISAs and pensions, allows investors to grow their wealth free from income and capital gains tax. Through reinvesting gains, they will benefit from compound growth over time. This is where expert financial advice is vital: a wealth planner can advise on the most tax-efficient structures according to individual circumstances.

Finally, Arbuthnot Latham suggests that in these times of uncertainty investors could consider retaining a lump sum to provide financial security should the unthinkable happen  ̶ a financial cushion should the unexpected occur.