Navigating Stormy Waters
When I was a child I remember the shipping forecast on the radio. It was like a foreign language with exotic names such as Dogger, Viking and Fitzroy alongside names of places that I could easily identify such as Hebrides and Plymouth. I remember being bored and wondering how long this would go on for as I waited for whatever program I wanted to listen to return.
However, for those on the seas this was a lifeline. Hearing the words gale force nine probably resulted in the hatches being battened down and going below decks until the storm passed or changing course to avoid the worst of the weather.
Sadly in the investment world we do not have an equivalent to the Met Office that is able to give us information as to where and when storms will arrive and pass in the financial markets. Instead in our world they most often pop up out of blue skies, or when it looks as if the outlook is bad it ends up being far better than anyone would have thought.
This makes trying to time markets a fool’s game, but of course social and mainstream media gives space to the loudest voices whether they be doomsayers or snake oil salesmen talking up the latest crypto currency.
Imagine a sailor trying to navigate a storm with a Corporal Jones character running about shouting ‘Don’t panic! Don’t panic!’, or a Private Frazer saying ‘we’re doomed, doomed’. That is what investors have to deal with.
The choppy financial waters we are experiencing just now are mainly the result of the dramatic rise in interest rates we have experienced in the last twelve months. Prior to this, companies had been sailing on a sea of low, and in some cases negative, interest rates for over the previous ten years.
These calm waters of free money meant that even the flimsiest of businesses could stay afloat. However, the increase in interest rates that we have experienced globally over the last year means we are going from warm to much colder waters.
It is like a ship rounding Cape of Good Hope in South Africa (which I recently found out was originally called the Cape of Storms and changed to its current name to try and encourage more boats to go round it – an early example of dodgy marketing!) where the warm waters of the Indian Ocean meet the cold Atlantic. This is a notorious area for ship wrecks and as we move from low to high interest rates some companies are meeting the same fate.
Those that are well prepared for storms, with good cash flows and strong balance sheets will be mostly fine. They are like cruise and cargo ships that can suffer rough seas with their built-in stabilisers ensuring those on board have as little turmoil as possible.
The weak companies, however, are found out and some of them, which from the outside appear to be well built and resilient, we find are less sturdy than the Kon-Tiki.
Size is not an indicator of strength and indeed some of the most vulnerable businesses are huge, as the demise of Credit Suisse demonstrates. Truth be told this is necessary. As in the natural world, the business world has always been about survival of the fittest. The artificially low interest rate environment of the last ten years led to many companies being able to limp on far longer than had we been in a normal environment.
Unlike the captains of the ships that round the Cape, we do not know at what point the waters will become calmer. They will calm at some point, and until then we will do our best to help you avoid knee jerk reactions to events and the odd freak wave, while giving you the stabiliser of investment diversification to help you reach your financial destination with hopefully some degree of comfort.