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Hildur Eiriksdottir, Director Asset Management, Íslandsbanki
Now the year is coming to an end, and we have behind us a tough year in investments where we had returned in negative territory on most assets and the worst year for world stocks since the global financial crisis. Central Banks have been raising interest rates to fight inflation, the liberal economic stimulus following the pandemic has transformed into fiscal tightening, and we see looming recessions across developed markets. The aftermath of the pandemic has also marked the year, but we see that severely disrupted supply chains are gradually recovering. The world’s geopolitical risk has heightened when we still have an ongoing war in Ukraine, which has continued to cause major shocks to the commodities market.
This last year in the equity markets has put investors’ risk tolerance to the test with increased volatility and few places to hide from the volatility in search of yield. Keeping in mind that securities investments are long-term, where the suggested minimum investment period is always 3-5 years, the current fluctuations should not be a reason for a change in investment strategy unless the long-term investment goals or the investor’s financial situation have changed. Given that the current year is not the first year of investment, a longer-term view is still likely to provide positive yields for a well-diversified portfolio, as the past few years have been quite rewarding in equity markets.
The level of risk tolerance, which is screened for at the beginning of the relationship in asset management and continuously during the relationship, is being tested in these turbulent times. Correct evaluation of the risk tolerance is highly important, both to assess the diversification when it comes to investments and to help with limiting outflows of securities in high volatility. Correct evaluation limits investors in taking on risks that might affect their level of well-being, and should investments be the reason for sleepless nights, the risk is too high and must be modified. Investments should always be for the long term and aim to secure a healthy financial future, but to be able to enjoy a financial future; one must also tend to one’s health, as severe stress can be very harmful to overall health.
The level of understanding by investors of the financial markets and the factors that influence the market can make a clear difference in staying the course going through turbulent times
There are many factors that influence the financial markets. Educating people from a young age on financials and financial markets has always been a passion of mine. The emphasis on starting education early gives investors a deeper understanding of investments. Many schools have intertwined financial education into their curriculum, where children learn about the cost of living, the calculation of housing loans, the importance of inflation and its effect, as well as insurance and investments, to name a few topics. Starting investing at a young age can be very beneficial for a financial future. We can see that young people in their twenties are making investments a priority and, in some cases, an interest. We also see a trend after the pandemic that people are starting their investments at a younger age and are eager to seek information and reach out to investment professionals for guidance. There is a lot of educational material provided online by investment companies, banks, and asset management companies on the fundamentals of investments. Furthermore, lately, a lot of very well-presented material is available on social media, such as Instagram. The level of understanding by investors of the financial markets and the factors that influence the market can make a clear difference in staying the course going through turbulent times.
Nothing is more important than good communication with clients, and this holds especially true for the year that is now coming to an end. The geopolitical tensions that have affected markets, inflation, Central Bank moves, and many other factors often need clarification and discussion to provide more comfort. Also, it is important for clients to be informed on how asset managers are responding to current market situations at each time and what can be done as a response to and in line with what is expected development. Should the emphasis on different markets be altered, should the duration of bonds be long or short, and is there a moment to exit the markets partly? Can the inflation be hedged somehow, etc.? These are examples of questions that clients are often in need of discussing. Nothing comes close to the importance of being available to clients and colleagues when volatility is high. Bear markets are prevailing, even though most of the time, it is a question of explaining why the course should be held and what actions have already been taken on the portfolio within the decided investment policy to adhere to the risk tolerance. Reassurance of actions being taken, investment guidelines being kept, and market information are all part of the discussions during a year like this one. Not to be forgotten is that portfolio management is always done in a structured way by a team of investment professionals built on data.
One can’t talk about the year 2022 without emphasising the importance of sustainable investments, environmental, social, and governance or ESG issues, and impact investing. There has been a huge development in the financial space in this area, and now ESG is increasingly being taken into the investment process, driven both by financial institutions and client demands. Implementation of guidelines and rules on sustainable reporting is becoming standard, and lack of information or data is no longer an excuse that can be accepted. We can all start somewhere and develop from there. During the past years, the data provided by companies in this field has improved and is being used along with data from scientists and data gathered by governments, universities, and other institutions. This data is then used to evaluate the given situation regarding climate change and biodiversity and how investors and businesses can play a vital role in supporting initiatives and innovation to reduce carbon with the aim of healthy ecosystems and the well-being of communities for generations to come.
Greenwashing has also been a discussion during the year, where products have been claimed to be greener than they are. This has put pressure on companies to be honest about what their products do and how they contribute to the environment and the reduction of carbon emissions or biodiversity.
Asset management is always for the long run, and sometimes we must look through the sharp moves happening from day to day and focus on long-term results. The importance of maintaining close communication and contact with our clients can’t be stressed enough during volatile periods, and that commonly strengthens the relationship even further in the future. But when talking about the future, it is also important that the investments are sustainable with a positive impact on the world, ensuring a brighter future for future generations because it can both bring a positive impact to the world and yield good returns for the future. While we welcome the new year of 2023 and say goodbye to the worst year in the financial markets for decades, we remain in a world with an ongoing war, geopolitical risks, high inflation, and interest rates rising faster than ever before. We must remember there is always hope when celebrating a new year, as that brings along new opportunities and excitement. We start the new year hopefully for healthier financial markets going forward than in the year that is now coming to an end.