An HL fund manager’s view – should we ignore the stock market noise?

Stock markets try to work out what the future is worth. It’s what they do.

When investors are optimistic, they’re happy to buy and share prices rise. When pessimism sets in, they go down.

These feelings can be toward individual companies, industries, countries or the whole world. People being people, those emotions can swing wildly.

And there’s a lot of pessimism at the moment. Talk of bear markets, recession and tech sell-offs are just some of the things weighing on peoples’ minds.

Investors have to try and work out whether what they see is just noise or a valid sign that things are moving for better or worse.

Here’s what I think of the noise and what investors should think about.

This article isn’t personal advice. If you’re not sure what to do, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest.

Beyond the dips, stock markets rise

My career began in early October 1987 when I started out as a trainee investment analyst at an insurance company in the City. Within weeks, stock markets around the world had crashed. I like to think the events were unconnected.

But why global markets tumbled one after the other has never been decisively established. Certainly, there were profits ripe for taking. Wall Street was having a bumper year before the crash. Some have suggested that new computerised trading strategies exacerbated events. Others point the finger at comments by the US Treasury Secretary threatening to devalue the dollar the weekend before the crash.

Human beings are fascinated by the drama of events. And market crashes draw the headlines.

But the real story has been the extraordinary creation of wealth in stock markets over the long term, despite the occasional interruption.

Had I begun work a month earlier and invested my first pay cheque into the UK stock market, I would by now have grown my money more than elevenfold, despite all of it being invested just ahead of a crash. Of course, this isn’t a guide to the future, returns are never guaranteed.

When I look at markets I try to focus on the important stuff. Things that will drive the long term. Here’s what I think are going to be the big drivers for the years ahead.

The climate gamechanger

If we do nothing, the changing climate will cause a lot of problems, and not just for investors.

Throughout history, major technological changes have driven growth. The technology changes we need to achieve the energy transition, to help with our changing climate, won’t be any different.

A move to renewable energy requires vast amounts of spending and well-placed companies are in line to profit.

Our current energy system imposes huge costs onto society through the consequences of pollution. Renewable energy frees us of those costs. Once built, renewables have low marginal costs.

Financial markets will fund the energy transition. After all, pension funds are crying out for assets with predictable long-term returns, which is pretty much what a windfarm looks like on a spreadsheet. The incentive to develop technology to create better solutions for energy storage are so great, I believe they will surely happen.

The digital revolution

By the time we reach 2050, the global economy will be so much more efficient, with massively reduced costs.

Everything includes the cost of energy and renewables will, if I’m right, have reduced this significantly.

Digital technologies will have evolved, and sciences like artificial intelligence will increase how quickly things change. There are brilliant people out there, but none of them have the processing speed of computers.

Sure, jobs will change, but how many of the great industrial/technology revolutions of the past led to lasting unemployment? It was the opposite.

I think real incomes will more likely be greater than lower because we will be achieving more with less, due to the efficiencies of digital business models.

But of course, there are hurdles between now and then and nothing with human input goes in a straight line.

Right now, we face an inflationary challenge, which is pushing interest rates higher. The longer authorities wait to assert control, the harder the task will be. There are at last signs that central banks are realising that the time to move in bigger steps is here.

Beyond that, we have the bewildering events in Ukraine and the knock-on effects unleashed by the conflict. Politics is usually a bit grubby, so while the players and events might change, business will push on regardless, for it must.

So when I think about where I need to look for the next investments our funds make, I’m increasingly drawn to thinking about the big changes needed to achieve the energy transition. But also how the use of digital technologies can raise efficiencies, reduce harm and create new commercial opportunities. I would encourage investors to do the same.

Steve Clayton is a Fund Manager of the HL Select range of funds.

The HL Select funds are run by our sister company Hargreaves Lansdown Fund Managers Ltd.

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