#19 🔊 Austyn’s Weekly Financial Strategy.

Below is a link to a short Q&A audio interview I’ve just recorded where I give my thoughts on these extraordinary times.

Link to Audio Recording

Nick Griffith:

Good afternoon, Austyn, how are you?

Austyn Smith:

Yes, very well. Thank you.

Nick Griffith:

Very good. It’s our weekly Q and A, it’s Thursday, 16th July. So, let’s get stuck in. An interesting question to start out with. There’s been a lot of talk around FOMO and TINA. So for those that have no idea at all what FOMO or TINA are and what that means, perhaps you could share your own experience?

Austyn Smith:

Yes. So FOMO is short for, “fear of missing out.” And TINA is short for, “there is no alternative.” And these are the two narratives that have been driving markets in the last few weeks. Possibly even the last few months.

A fear of missing out is a psychological bias, and TINA , there is no alternative, is really the market’s interpretation of it. And what they mean is that there’s no alternative than put your money in shares and go a bit more risky because nothing else is doing anything. And this is based upon the hope of a vaccine. There’s been a lot of press comments in the last week, which we’ll touch upon later in the call. There was a publication in The Lancet about the Oxford trial, and that was highlighted then in Bloomberg as well. So there’s a lot of positivity out there. But of course, we still have a long way to go.

So the problem with FOMO and TINA is that it drives people to take far more risk than perhaps they’re really comfortable with. And then of course, you’ve got to worry when the balloon pops.

Nick Griffith:

Sure thing. We’ve seen in the recent week, the beginnings, or the continuation, of a deteriorating relationship between China and the West. What impacts do you think this could have on economies and the future?

Austyn Smith:

Well, China is on a par with the USA now in terms of its economic power. And it now has a lifetime president in China, Xi Jinping. So they’re doing things that perhaps the previous Chinese regime wouldn’t do. And one of those, the most recent one, is riding roughshod over international law in relation to Hong Kong and the handover law in 1997. So they’ve just put in place a regime where they can extradite to the mainland, and bring people to trial back in China. HSBC bank and Standard Chartered have said that they support China in what they’re doing, but that’s because they do most of their business in China.

So there is now some feeling against those two companies that’s brewing, and also in terms of treating Hong Kong as if it was mainland China. So Canada have come out and said that they’re going to start putting restrictions in place and I think America has just said that as well. So it’s just a case of, “Watch this space.” China’s very powerful, lots of great companies in China. You can’t avoid it, but there are going to be perhaps some more shenanigans going on between Trump and China in the next few months.

Nick Griffith:

Yes, a lot more to play out. And in the overall market, what are you thinking for the second quarter earnings ?

Austyn Smith:

Right now we are in the second quarter earnings reporting period. And it’s really quite bizarre because the markets are looking at it as if it’s going to be so bad; they’re almost looking through it. So maybe we’ll get a real feel about what markets think later in the year.

And whilst there’s lots of issues to do with the virus in California and Florida, there’s still this momentum that we’ve had from technology this year with the Fang stocks, Facebook, Amazon, Netflix, Google. And of course, markets have the support of the global central bank, which is effectively the Federal Reserve in America. And they’re still pumping loads of liquidity into the system.

Nick Griffith:

Interesting, you mentioned the momentum in technology. What do you think is the risk of this becoming a bit more of a bubble, a rising tide effect, that affects the broader markets.

Austyn Smith:

Well, over the last few years, the American market has become more of a technology-based market. The S&P 500 has a large constituency of technology in it. Mainly because the large technology companies are US-based. So this has given stock markets momentum, and when the American stock market does well, our stock market will do well. But it ( the US ) seems to have gone a little bit too far. And we’re beginning to see some bubbles develop, and this is this TINA approach, there’s no alternative. So, people have allocated more into the American market, more into technology.

And I think we just have to be a little bit careful in the coming months. And in fact, in recent portfolio rebalances, we have just taken a little bit away from technology because it’s unclear as to how far that’s going to go and is the bubble going to burst? And obviously, technology in the long-term is a very good thing to be in, but we just have this uncertain six months of the impact of the virus and possibly a second wave. And also, we have in America an unsynchronized approach to what they’re doing. So, yes, America’s probably got more issues that Europe in that respect.

Nick Griffith:

And clearly, when you’re looking at the markets there’s dozens of indicators and economists, with conflicting information. Are there any indicators that you feel are showing recovery? And perhaps you could explain what those actual indicators mean in layman’s terms.

Austyn Smith:

Yes, there are some indicators, the most commonly used is something called the PMI Index, which stands for Purchase Managers Index. And what that does, it’s a global thing and it just asks people, “Are things better than they were last month?” So the recent PMI figures that have come through have said, “Well, yes, they are better than they were last month.” But it’s a little bit misleading because it doesn’t say, “Are they better than they were in January?” Because they’re not saying that, they’re just saying that things are better than they were at the absolute trough in April time.

So, yes, things are improving, but I think the debatable thing is, “How quickly things will improve.” And of course, that’s an ongoing journey, but it comes back to a mantra that I often talk about and that is, “A profit is not a profit till it’s taken.” So I think rebalancing a portfolio is already important, but it’s even more important this year because of the stop-start nature of stock markets.

Nick Griffith:

Talking stock markets, do you think in 2020, we’re now starting to see signs that they are becoming inefficient?

Austyn Smith:

Yes. This is a very contestable and debatable one because the whole rationale of investing is based upon something called ‘efficient market hypothesis’, which has been around for about 50 years. And in, I suppose, the last few years it’s been contested and people are now saying, “Well, actually are markets really efficient?” Because we’ve got a situation at the moment where we probably have a technology bubble. We certainly have a bubble within technology itself. So what I mean by that is, Tesla the car company, it’s share price has shot up this year and it’s quite staggering actually in terms of it’s price-to-earnings ratio.

It’s P/E is about 360. Whereas normally, a car company would be an average of about 25. So it’s like saying, “Well, are Tesla going to be dominating and taking over the US car market in the next few years?” Well, I don’t know about that, but that’s what the share price seems to indicate. And I think there is certainly a lot of speculation around certain shares. So that then filters into other sectors and then that can filter into this fear of missing out. And I think fear of missing out is really what’s been driving markets just in recent weeks.

Nick Griffith:

We are in choppy waters and uncertain times, but do you think that investors are in, unchartered waters?

Austyn Smith:

Yes, definitely, as there is little clarity in a number of areas. So, it’s why we’ve structured things in portfolios to be a little bit safer; and we call that Safe Harbour Planning ®. It doesn’t mean that we’re safe forever or that we don’t invest in the market.

It just means that we like to have a solid foundation from which we can drip feed in over time because there is such a divergence between countries. I mentioned earlier about the lack of synchronization of approach, especially in America. And anecdotally the Financial Times’ journalist articles that I read talk about their offices in St Paul’s and the city being a wasteland at the moment. There’s no one in there. And just in the last week, the UK released its gross domestic product figures where in April it fell 25%-ish. And there was only a very small bounce back in May. So it comes back down to this issue about, yes, things are improving, but how quickly we don’t yet know.

Nick Griffith:

Yes. And are there other stimulus measures, do you think, coming through from the US that will have an impact over there and over here?

Austyn Smith:

There are definitely more stimulus measures coming. Rishi Sunak announced some in the UK last week, which we commented on, and in America, they’re going to be coming up with something similar. Later on this week, the European Central Bank is looking at a tremendous amount of money. They’re looking at 750 billion euros, which is going to go in their coronavirus recovery fund for the bloc. So there’s still more money to come to help the real economy.

And of course, that’s led some conversations over the last week in “How are we going to pay for this?” And briefly, Rishi Sunak announced this week that there’s going to be a review of capital gains tax. So we expect some announcements to be made in October on that. And it’s likely that the capital gains tax will be going up. So that will be worked into some of our planning as the year progresses. I’m not saying the tax rates will go up straight away in October, but there’ll certainly be more debate and more indication as to what’s going to happen on that basis.

Nick Griffith:

So a lot of people are trying to guess what’s going to happen in the future. Can you believe the economists?

Austyn Smith:

No, you can’t believe the economists, just as you can’t always believe the journalists and all the other financial commentators or politicians for that matter. Certainly things are improving, but I think we do have to be a little bit cautious. And a lot of the data that comes out, wherever it is in the world, UK, Europe, or whatever, there’s things that are pointing to what’s possible over the next few months, but there are also things pointing to what’s concerning.

In terms of America, the Federal Reserve has said they’re going to support the economy, which helps support the global economy. The problem is, if they don’t follow through, markets will take a tumble. And even if they do follow through, they’ll probably get some bad press because they’re supporting and spending money on companies that they shouldn’t, because it’s just the nature of the stimulus that they’re bringing in.

Nick Griffith:

And for those that don’t know your process, how would you summarize the Austyn Smith Associates’ process for filtering all of that information out there and reaching a conclusion ?

Austyn Smith:

Well, we were talking about economists earlier on and they’re great for producing models and theories, but not very good, necessarily, in the real world because a lot of what they provide is assumptive. So there is a process of filtering that goes on. And I think one of our strengths is that we’re independent thinkers. And I am an independent thinker, and also having an open mind as well. So you filter in information from all sorts of sources. So there are no snap judgements or anything like that, but you’re filtering in information and judging it against your filter. Perhaps we can talk about that another time.

Nick Griffith:

I think that’s good. I think these weekly Q and A’s are part of the process of filtering and drawing conclusions on a regular basis.

Austyn Smith:

Yes

Nick Griffith:

And finally, I think there’s been some good news from Oxford University on its progress towards developing a vaccine.

Austyn Smith:

Yes. This has been going on behind the scenes, for a number of months, but it’s now become public knowledge. Bloomberg and Businessweek did an article on a lady called Sarah Gilbert who heads up the Oxford University trials.

And it’s very positive. They’re linking up with AstraZeneca. And AstraZeneca are linking up with a number of different providers and they’ve agreed to produce 2 billion doses of the vaccine when it’s developed. We don’t know precisely when that’s going to be at the moment, but there is a good chance that the Oxford University vaccine trials, which even in Bloomberg, an American magazine, is saying, “They’re way ahead of the game.” Could be in play by the end of this year or early next year. So it’s very positive. Of course, it’s going to take some time to roll that out. And when I mentioned AstraZeneca, that’s not a guide to go out and buy AstraZeneca tomorrow because I think a lot of the work that they’re doing is not for profit.

I think they’ve taken a very good stance on that. But certainly the whole medical profession, the global pharma industry, will probably benefit. So we do have some allocations there because of course, once you’ve come up with a vaccine, you’ve then got to deploy it and you’ve got to have the medical equipment and the resources to do that. So I think it’s going to be an international effort. And whether it’s the Oxford trials that come up first or someone else, I think there will eventually be a global response. So there is some positivity and some silver linings.

Nick Griffith:

Very interesting. Well, Austyn, I think that’s a wrap for this week. Thank you very much for your time this afternoon.

Austyn Smith:

Thank you very much, Nick. Take care.

Past performance is not a guide to future performance
The value of investments can fall as well as rise
Portfolio performance varies according to client circumstances

About Austyn

Austyn Smith is a leading advocate of the ‘risk managed’ approach and ‘all weather’ investing, and has been featured as a Citywire ‘Cover Star’ in 2010, 2013 and 2017.

Following his work on risk reduction strategies, in 2011 he was recognised by Citywire Wealth Manager magazine as ‘Being in a position of some influence among your peer group, and likely to take a leading role in setting the investment agenda for UK Private Client managers.’

Austyn has recently contributed to leading publications by Citywire, and the Institute of Directors, and over the years has been quoted in the Sunday Times, Mail on Sunday, The Independent, and Bloomberg Markets.

With over 25 years financial strategy and wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.