Investment Markets – Rocky/Bumpy Road ahead
Concern for individuals
Firstly, I want to state that if any of our clients need help with general support please call us – we are here to help. This crisis is reducing our collective liberty in a way that only virologists imagined. So, if help is needed, (away from financial matters) simply let us know – we care.
Our experience with investment clients
Naturally, all investors are concerned at a time of unprecedented crisis where the impact to the global economy is unclear.
We expect the deepest ‘peak to trough’ recession to unfold as ‘economic demand’ and the global economy effectively stands still. The duration of the ‘economic standstill’ will be decided by the compliance with Governmental direction in respect of social distancing/isolation.
As an advice business, we have had very few calls from investors expressing serious concern. For those who have called they have been pleasantly surprised with the percentage asset price falls (if such a reaction can take place) – with one or two, which is the norm – concerned about cliff face health and economic Armageddon.
No-one knows where this crisis is going in the short term – I wish I could provide a crystal ball statement – no one can.
Governmental views are evolving, based upon data/information updates. (President Donald Trump adjusts the White House thinking daily!)
A view that I consider to be realistic is that the economy (Globally) is going to worsen before improving – which means that investment markets are travelling on a very bumpy road, until there is a medical resolution to the health crisis.
State Support
We have witnessed a ‘joined up’ action point process from Government – like never seen before in the UK. The extent of the severity of the crisis is evidenced by the speed of action taken (and of course the tragic loss of life!)
HMRC are supporting workers (both via PAYE and the self employed based on consistent profit of 80% up to £2,500 p.m.)
Interest rates are at new historic lows and are likely to remain on this basis for some time to come…. Supporting the longer term ‘need’ to invest.
The priority for all employers and the self employed is to work out a new corporate and domestic budget and to understand how the state support provides a baseline level of income to enable normal (but limited) expenditure to be maintained.
Let’s face it, apart from utilities, food, domestic costs and any debts to be serviced there is little more that can be spent at this time, domestically. (There are even a few who will cut back on wine and fizz consumption at this time, but I know of some who are certainly increasing expenditure in this area!!)
Investment Market Snapshot
Most UK investors consider their investment positions against the FTSE 100 as a proxy indicator. This is not an accurate proxy indicator – relating to how a risk managed investment portfolio is constructed but, in order to keep ‘understanding’ simple, the position of the FTSE 100 over the last 3 months is illustrated:
Mid-January saw the index at 7674.60 (16 January 2020) and 19 February 2020 – 7436.60. By 27 February it was 6580.60 leading to steep declines to closing on 22 March 2020 at 4993.90.
The peak to trough asset price falls of the main market index to the point of writing are circa 35% – to this point circa 30% or so.
Risk Model Performance
I have been measuring the portfolio position a couple of times each week and considering if I should make an advice recommendation to change the asset construction. The result is that I would not make changes to the funds in the risk models at this point as I cannot (and no one can) predict short term outcomes.
The reduction in asset values vary between -7% reduction in Risk Model 2 to -15% in Risk Model 9 over the period of the last month – where the Risk Model 9 is effectively a full risk equity fund (globally asset allocated). So, as much as pain is being suffered, the reduction in asset prices are as expected given the extent of the crisis. (This data is based upon the close of the markets on Thursday 26 March 2020).
No one knows how quickly a positive health picture will develop – leading to a faster return to normality with Global economies so it’s impossible to make predictions (accurately) so there is danger in ‘taking action’ to sell investment units at this point in time. Again, unless we are informed to the contrary, all investments are positioned for the long term.
Providing regulated independent financial advice requires the delivery of a ‘suitable’ investment outcome – meeting investment needs for income/growth over the long term – which is why short-term views are impossible to provide.
A simple action plan – Key Message
At a time of crisis, having a ‘cash pot’ for ‘bills and things’ is essentially understood. Using a cash pot is now the best course of action. (By this I mean suspend taking withdrawal payments from investment pots – paying ‘bills and things’ from bank cash/deposit accounts).
Of course, market asset values can go lower – I am expecting this – but if you are not selling units to pay out ‘income’ or ‘capital’ the theory is that over time – as the crisis abates, from a health perspective, – the economy will slowly improve enabling unit prices to recover rather than being disposed of to pay out income or capital. How long this crisis takes to improve is unclear at this stage …….
Action for investors
- Use cash in the bank to fund ‘living costs’
- Do not sell investment funds – unless you are absolutely desperate for money
- Stop monthly payments out – as this requires units to be sold at a loss, therefore the balance of units would reduce . ( You will need to provide an instruction to us in order to take this action).
Consider
Buying more units, monthly or as a lump sum – where asset prices (unit prices) are low – this provides improved longer-term value. (As always, you must have a 5 year plus time horizon for the investment).
We will set these products up (at no cost as we love our clients – if a recycling of income payments from a Trust or the likes is required – in order to comply with carve-out discounts).
We can’t do a better price than free!
We very much hope that this position assists you with taking action, or inaction as the case may be, and making decisions that improve your positions for the longer term. Appropriate action in a time of crisis pays off over the longer term.
Opportunity
Of course, there are opportunities at a time of crisis – so consider your position – feel free to call me to discuss any concerns and gather a professional perspective about your personal position. (Advice is always specific to the individual/entity).
Do not forget to use your tax allowances – even if you park the capital in a deposit fund – until you are happy to invest into markets – please note that interest rates are effectively zero – such accounts are a holding fund until you are happy to invest.
Tax Year ends very shortly – ‘use’ your allowances, don’t ‘lose’ your allowances.
I am very conscious of not bombarding our clients with communication at this time of crisis so, suffice it to say, we are here to assist you.
Stay safe and stay healthy – we are ……..
Very Best Wishes.
Richard, Sian and Best Price FS Team
