The elephant in the room: how long can a boom really last? 

July 17, 2017

Rising confidence in the market 

Global markets are at record levels and confidence continues to strengthen but surely boom will always turn to bust – wont it? The question for UK investors is how long will it take for a downturn to take place and what can be done to protect your investments?

At present, many signs point to continued growth so there’s no need to panic. A crash isn’t on the immediate horizon. Rising inflation is often a sign that the global economy is gaining momentum, which is good for corporate profits. The Federal Reserve has hinted at another increase in US interest rates which can be seen as an expression of confidence by America’s central bank. President Trump has also hinted towards cuts to corporation tax, which can only benefit a rising stock market and serve to keep it afloat for the foreseeable future.

Reasons to remain cautious 

Despite market confidence, there are reasons to remain cautious when it comes to your investment strategy. Closer to home the

impact of the EU Referendum and the more recent General Election may not have had the drastic impact many predicted, however, thanks to continued political instability, we have seen a large fall in Sterling’s value versus other major currencies. In addition, the UK’s savings rate has fallen to its lowest level since the 1960s. At the same time, levels of real household disposable income have fallen for three quarters in a row for the first time since the 1970s. This, coupled with a notable uptick in consumer credit usage, indicates that now may be the time for more cautious investing ahead of a potential downturn.

Can booms last forever? 

Back in the USA, Wall Street is currently being supported by negative real interest rates and the prospect of tax cuts to come alongside the continued promise of investment in infrastructure from President Trump. As a result, stock market records will continue to be broken, but what happens next when markets get spooked by rising interest rates, burgeoning budget deficits, protectionism or a combination of all three?

Learning lessons from the past remains crucial. Traditionally, one of the best yardsticks for the value of shares has been the cyclically adjusted price earnings ratio constructed by the economist Robert Shiller. This ratio is currently around 30 and has only twice been higher: in 1929 ahead of the Wall Street Crash and in the last frantic months of the dotcom bubble of the late 1990s. Despite this, investors seem content to remain optimistic and are arguably ignoring the continued global political instability. When it comes to your investments, though, you simply cannot afford to hope for the best.

No one knows what will happen on Wall Street tomorrow, next week or next month. With many investors still upbeat, stock prices are likely to continue to rise. Eventually, however, overvalued markets do correct and revert to justified levels. When that happens, it’s seldom pretty. There is no reason to believe things will be different this time.

So, what does this mean for UK investors and what can you do to protect your investments against a market downturn?

Start increasing your cash position 

Holding cash will reduce volatility in your portfolio, and while you will (currently) lose value in real terms, it should hold its absolute value in a market downturn. Aim to raise cash by taking profits from winning positions, thereby locking-in gains. This strategy will both protect your portfolio should markets fall, allowing your growth to ‘restart’ from a higher base, but also crucially free up some firepower to allow you to reinvest at the bottom of the market. Market dislocations lead to significantly mispriced assets, and having some liquidity in cash can prove highly profitable.

Reposition your portfolio 

As markets move ever higher, a sensible strategy in addition to raising cash is to reposition your portfolio’s risk exposures away from pure equities. This can be done by shifting a portion of your assets down the risk spectrum. Traditionally this would be fixed income, though that asset class now also looks dangerous in large part. Cash aside, we would advocate moving towards ‘alternative’, or hedge fund-like vehicles which are able to navigate markets regardless of their conditions. To a lesser extent precious metals can act as a ‘disaster hedge’.

Don’t throw out your stocks 

The worst possible strategy whenever the market starts to turn downward would be to simply liquidate your portfolio. Regardless of short term volatility, there remains a strong, long term case for maintaining a significant portion of your investment portfolio in stocks, even if the market turns. Over the long term, exposure to equities is crucial to meeting your investment goals. This being said, you will want to make sure that your portfolio is as armoured against negative market forces as is reasonably possible.

Preparation is always an excellent strategy, regardless of the economic climate. Lowering your exposure during a market peak makes sense as, while it can be tempting to believe that a strong market will last forever, whenever markets hit new highs, the likelihood of a major decline increases. Preparing for it doesn’t make it happen — but it does put you in an improved position once it does.

When it comes to Fairstone Group’s investment portfolios, we have adopted a more cautious standpoint by reducing exposures to higher risk assets overall, but have also further diversified away some traditional bond and equity risk by holding ‘alternatives’, along with precious metals.

We believe that these moves will enable us to protect client assets much more effectively during a sustained market downturn, and our nine years of performance track record suggests this has historically been the case.

With asset prices at all-time highs, economic data weakening and the world being in the grip of a truly unprecedented period of monetary flux, now more than ever, seeking good quality financial advice and investment management will be crucial to clients’ success in navigating these uncertain times.

Fairstone Group
Fairstone is a national financial advisory and wealth management group based in South Tyneside.
For advice on navigating your financial risk visit:

0845 605 0680

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