Back to the future: no need for roads if investors have a plan

Time in the market

Other reasons suggest the most profitable course of action is often choosing to ride out periods of market volatility without panicking. The first is that ‘time in the market’ has consistently proven to be more important than ‘timing the market’. Over the long run, stock market returns have historically been robust, even when major stock market crashes are taken into consideration.  

While taking the long view is sensible, Canning points out that you still need to align your time horizon with some sense of value. Fundamental shocks are always possible, and usually unpredictable, but if assets are expensive to start with, then the recovery time from these shocks is likely to be even longer. This was the case with equities after the bursting of the dot-com bubble in 1999 and bonds since 2022.

Managing this risk needs to be balanced against the risks of missing out on gains near the top of markets, which can be significant, or being held back from re-engaging with markets once valuations are more attractive.

For Canning, the key point is to make peace with your decision-making and, most importantly, avoid flipping from one approach to another. “The biggest worry is that you hear far more investors talking about having long-term time horizons in the good times. Today, lots of people question why you would hold any other assets when equities offer the higher expected returns over the long run.”  

He adds: “You worry that when the inevitable tough times emerge the conversation turns back to diversification and avoiding equity correlation.”

Expect the unexpected

Much time and effort is spent trying to predict the future. However, Canning suggests that many investors’ claims to have an information edge in forecasting the future are not very plausible.   

Interestingly, in financial markets, knowing what’s going to happen is not always helpful. In the film ‘Back to the Future Part II’, a character attempts to outmanoeuvre uncertainty by travelling back in time armed with a sports almanac, a perfect guide to future outcomes.   

Many investors would love to have such a useful guide to the future. But unfortunately, when it comes to investing, even if you had a crystal ball for future events, that doesn’t necessarily help you predict what is going to happen to asset prices.   

Take the covid-19 pandemic in 2020, for example. If someone had said the global economy was going to be shut down, you might have predicted that equity markets would plunge. Indeed, they did initially, but they rebounded quickly and indeed ended the year posting significant gains.  

Another example is the underperformance of US equity markets last year. At the start of 2025, there was an expectation that tariffs would support the US market at the expense of other regions, and act as a tailwind for the US dollar. As it turned out, despite tariffs that were stronger than anyone expected, the dollar weakened significantly and US equities underperformed other markets by the greatest margin in several years.  

Markets constantly have the capacity to surprise investors. For this reason, Canning says the M&G Multi Asset team does not forecast what’s going to happen to, for example, interest rates or inflation. And even if they did know, he thinks it probably wouldn’t help with forecasting the direction of asset prices.   

“What you need is a process that incorporates what's already happened to the assets and how they were priced before,” he suggests. “Our approach would lean towards being greedy when others are fearful (clichés normally exist for a reason), and having valuation at the forefront.”   

No almanac required: start with valuation

For investors with a long-term horizon, unexpected periods of volatility can also present potential opportunities, particularly if the price moves are rapid and driven by panic or news that is inconsistent with fundamentals such as earnings or inflation. Excessive pessimism (and optimism) can lead markets to overshoot, resulting in asset prices diverging from fundamentals.   

According to Woolnough, regime-changing events can be rapid or they can be glacial. For most macro variables, they tend to be glacial, such as a shift to low inflation or vice versa.   

In his view, what is interesting is not the regime change itself, but how investors are thinking about any shift. “If you believe the market is mispricing the consequences of any potential change, that provides an opportunity for investors anchored by robust valuation frameworks,” he says.   

Disciplined, selective investors can potentially exploit mispricings that arise from fear or greed, but it is critical for active investors to have a framework for dealing with uncertainty.   

And central to any successful framework is valuation. Woolnough explains: “Generally speaking, we are risk averse. So, what we try to do, as investors, is to create a valuation framework that means we can move on from biases and focus on what we believe the more likely outcome will be from a risk-reward perspective.”  

Valuations always matter because they are the starting point which determines the potential long-term return of an asset. Investing in expensively valued assets where expectations are high can limit future returns. Conversely, when the future is uncertain, buying lowly valued assets can provide some protection against unexpected scenarios.

A cheap asset for which investors have low expectations could be resilient, even during challenging times. Moreover, if anything positive happens, it could perform really well.

One way that active investors can approach these promising, but somewhat speculative, companies is to ensure that they are being adequately compensated for the risk that something goes wrong. Investors can also manage the risk of these longer duration opportunities by sizing their positions accordingly.   

Recent developments in the software sector highlight the risk of being too optimistic. Until recently, so-called software as a service (SaaS) businesses were well loved and thought to have high-margin, sustainable business models. However, the development of new AI services and products has threatened to disrupt their businesses, resulting in steep share price falls.  

Canning observes that when investors only see blue skies and no clouds ahead, it often only needs a handful of negative stories to shatter that view. “Many have seen SaaS declines as a market being caught up in narratives and therefore a great opportunity. That may be true, but we must also consider the possibility that the original price was based on such lofty expectations that it didn’t take much to disrupt it.”  

AI is likely to be an enormously transformative technology, but it is important to avoid getting carried away in some euphoric narrative: the potential monetisation from AI is still uncertain and the increasing pace of innovation makes it difficult to predict future winners in this evolving environment. 

Similarities and differences

In today’s world it is possible to recognise both similarities and differences with many earlier events. Notably, the war in Iran and the disruption to oil and gas supplies resulting from the blockade of the Strait of Hormuz have led to comparisons with the oil crisis in the 1970s. This saw global energy prices soar and triggered severe economic recessions.   

The current circumstances are different and the impact is not expected to be as severe. But one aspect could be similar. The disruption in the 1970s led directly to the development of the French nuclear power industry. Under the slogan “In France, we do not have oil, but we have ideas”, Pierre Messmer’s ambitious development wave saw 56 nuclear reactors installed over a period of 15 years, which materially ate into the oil-fired power generation of the time.

This echoes with the current debate about energy security. According to Michael Rae, a Global Equity Fund Manager at M&G, “the analogous outcome today may well be a revived focus on the development of renewables and storage in energy-importing countries.”   

However, Woolnough also highlights one crucial area where the current situation differs very much from the past – a perilous global fiscal backdrop. In previous economic crises, policy makers could rely on two levers to pull: the fiscal lever (government spending) and the monetary lever (interest rates).

As a result of rising government debts and higher borrowing costs in developed countries, it has arguably become very hard to pull the fiscal lever, leaving only the monetary lever.   

“Monetary policy moves are likely to be more rapid in a crisis than they have been in the past, given policy makers have only got one lever to pull,” he suggests. This matters because with limited room to manoeuvre it might be harder for economies to bounce back from any slowdown quickly.  

The longer the conflict in the Middle East and the disruption to energy continues, the greater the chance of an economic crisis developing. The world has not experienced a major, widespread recession for a generation, notwithstanding covid. Instead, there have been a series of short, V-shaped recessions, which might explain the ‘buy the dip’ mindset that Canning identified. 

While policy makers might have fewer tools to use in the event of a recession, Woolnough thinks that there have been some positive changes since the global financial crisis (GFC), which have made the financial system more stable. “A lot of the weakness in the US and European banking system has been resolved; capital levels have been raised, management teams have become more conservative and regulation improved.”

A notable consequence of these reforms has been the rapid expansion of the private credit market. Private lenders have stepped in as banks have withdrawn from certain types of lending in order to optimise capital. Recently however, concerns have been voiced about potential difficulties in the private credit market due to a couple of high-profile defaults and private credit exposure to the software sector.   

However, Woolnough claims that this type of lending is “permanent capital”. Reassuringly, rather than borrowing for a short term and lending for a long term, as happened previously, he thinks there is a greater match between the assets and the liabilities.   

Although the private credit market has grown to an estimated $2 trillion, the fact that this is not within the banking system is arguably a positive development. Thanks to the post-GFC reforms, any future difficulties may not have such a dramatic systemic impact.   

Looking back to the future

It has been said that history doesn’t repeat itself but it does often rhyme. Financial markets are currently being buffeted by myriad disruptive forces, including geopolitical tensions and long-term structural trends. Even though the constant news flow may sometimes make investors feel like they are in a tailspin, today’s shifting landscape is arguably not unlike previous periods of change.   

There may be no almanac for how markets will unfold. However, active investors with a clear framework do not need every twist and turn mapped out in advance. They can shape their own investment future by staying grounded, resisting narrative-driven extremes and focusing on valuation and risk-reward.   

In investment, the destination matters more than the precise route. Detours and volatility are inevitable. However, with a disciplined process and investment goals set, long-term investors can ride out most bumps, and even potentially exploit opportunities that arise along the way.   

The future does not have clear roads laid out, but investors who know where they are going and follow proven investment principles may find they do not even need roads for a successful investment journey.