Expert views on investments and market stability

Active Chartered Financial Planners director and independent financial adviser Karl Nendick answers the difficult questions on most investors’ minds…

Since the UK voted to leave the EU in June 2016 the main topic at client review meetings has been Brexit. However, this has more recently been overshadowed by issues around Covid-19.

The B-Word

On January 31 the UK finally left the European Union. We thought that Brexit and the US presidential elections would be the main influencer of markets throughout 2020. How wrong we were.

Covid-19

Since Covid-19 originated in China at the end of 2019, it has taken over as the main influencer, not only on markets but on the way of life for the entire world. The spread of this pandemic has been staggering, with the advice of governments changing daily as anxiety levels rose due to uncertainty.

Like the spread of the virus, the rate of policy change by prime minister Boris Johnson and his team has been remarkable, but necessary. First, the advice was to wash our hands more regularly. The chancellor Rishi Sunak then pledged £30bn to fight the virus in his first budget. Other than that, it was business as normal.

We’ve since seen the closures of bars, restaurants, schools and universities as well as being told to stay at home. In addition, the military has 20,000 personnel on standby and the government has increased fiscal support to £350bn. It’s possible that lockdowns may be next, but this could be old news by the time this article is printed.

Never before have we seen governments around the world order their country’s economic activity to be curtailed, which is undoubtedly leading the globe into a recession. This has led to corporate profit expectations in various risk assets to be slashed as the uncertainty hits home.

We’ve seen huge swings in the equity markets around the world with extreme volatility at times. As with the financial crisis in 2008/9, even safe havens such as Government Bonds have suffered as investors sold off assets to raise cash.

There are key differences to 2008/9, though. Back then, securitisation led to the whole financial system crashing down. Investors bought debt to provide security in portfolios but this was adding to the risk. When the system failed, it paralysed global activity. Covid-19 is a massive external shock that’s caused a worldwide government-enforced economic downturn to help protect populations. Consequently, this has put many companies at risk of default, hence the panic selling that equity markets have experienced recently.

In 2008/9, there was no real agreement on what the correct policy response should be. The huge bailouts to banks caused unpopular public opinion; people thought it was unfair that those responsible for the risks taken should continue to live luxurious lifestyles. Today no one is objecting to the vast sums of money the government is committing to support those suffering as a result of the economic activity restrictions imposed.

The chancellor has pledged measures to help workers and businesses during the pandemic, including protecting 80% of incomes for those employees who would have lost their jobs (known as furloughed workers), an increase in sick pay, enhanced benefits for the self-employed and deferring VAT and business rates for certain businesses. More measures will surely follow.

It’s clear that governments across the globe will borrow heavily from the worldwide bond market. Interest costs are currently around 0% and will stay there because central banks will print the money that governments can pass on to their people. In the developed world this is almost unheard of but we have no choice.

And other issues…

We have the Brexit trade deals to negotiate this year. Nothing will change immediately as the UK will still be bound by EU rules until December 2020. After that, things are a little more uncertain. Trade negotiations have begun with the EU, but Covid-19 will have an impact and may lead to Boris Johnson’s deadline of ensuring a deal is in place by December 2020 being put on the back burner.

Balancing the EU trade deal with the United States trade deal will also take some manoeuvring.

The next EU summit is planned for June, when progress on the negotiations will be measured and we could request an extension. Therefore, investors’ confidence could be impacted further should the negotiations be unsuccessful, which could affect stock market performance. Markets will, therefore, be very sensitive to any progress updates, or lack of them.

We also had Russia and OPEC (Organisation of the Petroleum Exporting Countries) disagreeing over oil prices in March which, again, didn’t help market confidence, with oil prices down to unthinkable levels only a few months ago.

Markets will also be influenced by the US presidential elections in November.

What does this mean for you as investors?

The budget on March 11, along with the major actions already mentioned, gave us further evidence of the government’s vision of how they’ll fight the economic crisis, but the hope is that we start to see the first signs of the virus coming under control very soon.

This should provide fund managers with potential investment opportunities for their clients’ portfolios as some assets may well be substantially undervalued.

The government’s strategy can bring challenges further down the line with a recovery boom forcing bond yields and therefore inflation substantially higher than we’ve seen in recent years. However, for the economy as a whole this may not be a bad thing.

This is an extreme situation where extreme measures are required, effectively ‘mothballing’ the economy to ensure it’s in a position when normality eventually returns.

Of course, we’re in regular contact with our investment partners to ensure our clients’ investments are well managed during these uncertain times.

Given how quickly markets and the economic outlook can change, it’s imperative that you regularly review your portfolios to ensure they remain suitable to your needs, that you’re comfortable with the risk and fully aware of how they are and may perform moving forward.

Our close relationships with clients and investment partners reaffirms our ongoing commitment to regularly do just this, with Active’s advisers completing more than 1,300 face-to-face client review meetings in the last 12 months alone.

The days when you simply filed the annual statement in a drawer are gone! There’s an abundance of knowledge out there to help you. You just need to ensure you are taking it from the right sources.

The value of your investments can go down as well as up and you may get back less than you originally invested.

If you would like to speak to someone about this article or any other financial planning needs, please contact Active on 01642 765957.

activefinancialplanners.co.uk
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