• Watch me discuss how domestic microeconomics might impact individual sectors and companies watch here

We are living in some volatile times

Screen Shot 2016-03-21 at 10.57.09 AM

We are living in some volatile times

Since mid-last year, the S&P 500 equity index has swung by approximately 12 per cent in a matter of days or weeks – four separate times, as shown below. It has been more than five years since we have seen anything like the price swings we are seeing now.

S&P 500 Index in USD over last 12 months (Source: Bloomberg):Screen Shot 2016-03-21 at 10.48.59 AMAdd to this, large swings in the AUD/USD foreign exchange rate. For Australian investors in global equities, movements in the exchange rate can either exacerbate or attenuate global volatility – depending on the direction of the moves.

As shown below, the AUD/USD exchange rate declined by approximately 15 per cent between May and September. This move, alone, added 15 per cent to the Australian dollar returns of any foreign investments held by Australian investors.

Since January this year, the reverse has been true: the Australian dollar has appreciated against the US dollar by 11 per cent. This reduces the Australian dollar returns of any foreign investments held by Australian investors.

AUD/USD Exchange Rate (Source: Bloomberg):Screen Shot 2016-03-21 at 10.49.14 AMWith respect to volatility, our view is that they are noisy short term movements that tell us little about long run return expectations. Yes, these movements can be uncomfortable to deal with in the moment – but over the longer term, these movements become less material.

We think your long term objectives should act as your compass for navigation during such turbulent times.

Consider the GFC, during which the S&P 500 more than halved. A painful time for all investors (indeed all people) for sure.

S&P 500 Index in USD (Source: Bloomberg):

Screen Shot 2016-03-21 at 10.50.06 AM

Yet, when viewed with a much longer time horizon – two decades are shown below – we can see that equities will deliver positive returns over time. We think it is helpful to review this concept from time to time – particularly when markets are volatile and investors are feeling uncomfortable.

S&P 500 Index in USD (Source: Bloomberg):

Screen Shot 2016-03-21 at 10.50.50 AM

Andrew Macken is a Portfolio Manager with Montgomery Global Investment Management. To invest with Montgomery domestically and globally, find out more.

Andrew Macken is a Portfolio Manager at Montgomery Global Investment Management. Andrew joined Montgomery in March 2014 after spending four years as a Research Analyst under Jim Chanos at Kynikos Associates in New York.

INVEST WITH MONTGOMERY

Why every investor should read Roger’s book VALUE.ABLE

NOW FOR JUST $49.95

find out more

SUBSCRIBERS RECEIVE 20% OFF WHEN THEY SIGN UP


This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a financial advisor if necessary.

Post your comments