Message from our Group CIO: Understanding the recent market correction

As you may have noticed, global equity markets have experienced some volatility recently, leading to a bit of a correction. We understand that such fluctuations can be concerning, so we’d like to provide some context and reassurance.

Firstly, it's important to recognise that market corrections are a natural part of the investment cycle. After one and a half years of strong returns, it's normal for markets to take a breather. These periods of volatility, while unsettling, often present valuable opportunities for long-term investors.

Rather than a single cause, the recent correction can be attributed to a number of forces. For one, investor positioning has been crowded. This means that many investors have been piling into the same trade – for example, taking a short position on the Japanese yen versus the US dollar (more on that in a bit), or a long position on AI stocks. Crowded positioning makes the market vulnerable to sharp moves if they are unwound. 

The Bank of Japan’s unexpected rate hike last week contributed to a rapid unwinding in these positions – and in particular, the yen “carry trade”, a strategy that involves borrowing in a currency with a low interest rate (in this case, the yen) and investing in a higher-yielding asset. The unwinding of these trades triggered a chain reaction across global assets, leading to other crowded positions also being unwound.

Adding on to that, uncertainties surrounding the US election, coupled with recent weakness in US jobs data, further prompted funds with shorter time horizons to trim their positions and take a break for the summer.

That said, it’s important to take a step back and look at the bigger picture during times like these. Prior to this correction, global equities were up more than 13% in the year to end-July. After Friday’s correction, they were still up nearly 10%. Much of these gains were also driven by high-flying AI stocks – with the Magnificent Seven up as much as 51% this year. Given the market’s substantial gains, this correction can be seen as a natural and healthy development.

Warren Buffett famously advised, "Be fearful when others are greedy and greedy when others are fearful." While easier said than done, this wisdom reminds us that moments of market downturns can be opportunities to put extra cash to work.

If you’ve been hesitant to invest because you thought the markets were too high, now might be a good time to consider entering. Buying during a correction lowers your average entry price overall and can enhance your long-term growth potential.

We want to emphasise that we're not suggesting trying to time the market. No one can predict the exact bottom, and attempting to do so often leads to missed opportunities. History has shown that markets tend to rebound, and those who stay invested are more likely to benefit from these recoveries.

In the coming days, we encourage you to take a step back, review your investment goals, and consider if adding to your investments aligns with your long-term strategy. Our team is here to support you and answer any questions you might have.

Thank you for your continued trust in us. We are committed to making investing simple and straightforward so you can stay focused on achieving your financial goals.