#2 🔊 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 this week’s turbulent market events.
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
Market Events 13/03/220
I have a couple of extra questions after a turbulent week:
The US pumps 1.5 trillion into the economy, UK lowered interest rates and the EU decided not to cut their rates, however, these didn’t calm the markets… The normal rules don’t seem to apply. What do you think?
Yes, yesterday was one of the biggest drops ever in global stock markets. I think the UK end of the day sort of 10.7 down or something along those lines and the US was about 10% down as well, and, yes it’s a very unusual thing to happen but partly caused by some of the things I mentioned in my last calls that markets are becoming incredibly volatile. There is something called the Vix index or the volatility index, which is also known as the fear index. Yesterday that figure surpassed where it was in 2008 so that’s a sort of you an indicator as to the degree of strain behind the scenes in Financial Planning of markets with what’s going on at the moment. And so, you’re right! Earlier in the week, the UK cut rates, last week there was an emergency cut from the federal reserve in America.
But that sort of thing, whilst it is supposed to calm markets, it doesn’t stop the spread of the virus and I think this has really hit home for the American Markets, which are mainly based in New York. We also had a state of emergency being called in New York and last night, the broadway shows have been closed for up to a month. So I really think it is beginning to hit home there.
We are at the end of the beginning, but the beginning of the next phase as it were, so I think that is still playing on the minds of markets.
After a big decline, markets do bounce and they bounced a bit today, although some of that as we speak this afternoon has eroded so that just shows still how fragile confidence is. The fact that the EU didn’t cut interest rates yesterday upset the markets but Germany has announced a very big stimulus package. I’m also seeing President Trump is about to speak declare a national emergency to speed up the virus response in the USA. I think over the weekend you’ll see some concerted central bank co-ordination, to do what they can to appease financial markets but they still remain quite nervous.
BBC News – Coronavirus: A visual guide to the economic impact https://www.bbc.co.uk/news/business-51706225
Certainly. As you say, yesterday markets fell 10% and you’ve said this year it’s been 30% down from recent highs. For some, it signals opportunity.
I think because people are preoccupied with their busy lives and the news is so focussed on the virus, whilst yesterday people may have read that the UK stock market was down 10%, what people might not realise is that we have had quite a lot of volatility over the last couple of weeks so if you take all of that in the round year to date just over the last month or so the UK German and French Stock Markets are all down 30% and in USA they are down about 20-22% so it is a global thing and so putting that into context where we are at this point with what we do for clients and our signature cautious blend strategy, we are down a bit, probably around the 5/6% mark which obviously we don’t like and we don’t want for clients in the context of what’s going on; it could have been a lot worse and you know, even a FTSE tracker would have been down 25% or so, so that is the nature of the things we have been dealing with over the last few weeks and the portfolio construction has stood up to that pretty well, and, the recent work we have been doing with clients we call ‘safe habour planning‘ and what is something we came up with in 2008 during the last crisis where we wanted to help protect people. It doesn’t mean completely moving into cash or anything like that, it just means building in some buffers within the portfolio. You just have to be careful with what you change, as you don’t want to change too many things because if markets were to suddenly bounce back, you want to participate in some of that. But we just wanted to try and smooth out some of the problems that may yet still occur because even with these large drops in value in the wider market, unfortunately, there is still room for it to get slightly worse before it gets better.
Back in 2008, the FTSE world markets had to fall by as much as 45% before things got better. Pretty similar in 1987 as well as 2001 and 2003, where there had to be a similar drop in value before markets bottomed out. But the worst in living memory was in the 1970s, where the UK stock market, unfortunately, fell about 70% before it recovered.
Now, I’m not saying it will be anywhere near like that. But, you know I think when we talk about buying opportunities, there probably is one out there but you have to be quite careful and it has to be done gradually.
So when do you think is the right time to buy safely back into equities?
Yes, I think safely is the operative word. I don’t think it’s safe at the moment; so for example, talking to you today on Friday, markets fell a great deal yesterday, they opened today with a bounce and by lunchtime, we’re up 6 or 7%, which is great and later on this afternoon as we recording this call they’re almost flat again. So that just shows you the huge daily swing in markets at the moment and just a general sense of lack of confidence in perhaps that’s we haven’t quite seen the worst of it yet. I think that’s really going to come out in the next few weeks and few months because of restrictions on sporting events, restrictions on the leisure industry, restrictions on travel and entertainment industry. So, the markets have been pricing in things as they’ve gone along because it’s been quite a fast-moving thing. There are still other things that can happen, one of the things that were very mysterious yesterday in markets was, normally, when you get a big stock market fall, everyone rushes to safe havens, interestingly some of those safe havens sold off yesterday and the research on this, this morning, indicates that there are probably some liquidity issues within the market in the Financial Plumbing behind the scenes; a bit like the in the credit crunch of 2008, but different, and that’s causing some people some concern because that’s not in full view at the moment that’s obviously behind the scenes and I think that’s why you mentioned this massive stimulus package that the Federal Reserve has just started to introduce, but it hasn’t caused markets to regain our composure not just yet.
So in terms of where we are headed, if you look at this year as sort of a V-shape, the consensus is that things will perhaps get slightly worse before they get better and possibly by the end of the year things will be back to normal. What we have tried to do with recent portfolio fine-tuning is, really just chop off the bottom of the V because we really don’t want to go right to the bottom and that helps stop the rot as it were, and as I mentioned earlier we have been able to do that compared to sort of wider stock market falls. Also, the other thing that could happen is we might not have a V shape recovery it could trundle along the bottom for a while so it turns into an ‘l’ if that makes sense, a sort of l-shape. So we just want to preserve values as much as possible and try and introduce some asset classes that we think either help bolster current values or possibly go up in value if safe-haven assets continue to be in demand.
Thanks, Austyn. On another topic, a new chancellor and a new budget this week, any initial thoughts on what was announced?
Yes, I think was a good budget in terms of generally there is a lot of money that will go into the system. I do think there’s going to have to be a little bit more added to that though as well. I think you know, that will probably happen. The government have decided to borrow whatever is necessary, for example, to support the NHS and if anyone saw the full Boris press conference yesterday I think the brutal reality of that hit home to markets and the fact that they are just trying to smooth out the issue as far as the NHS, beds and ventilators are concerned over a longer period of time. That seems to be where they are at the moment, but I think they’ve got more announcements to make I think personally that they didn’t want to announce too many things at once because otherwise, it would have been too draconian or even could have come across as ‘too panicky’ so I think there will be other announcements pretty much every day I would have thought. Markets will take that on board, and that’s why, you know, in two weeks time we could be in a very different position which is why we would rather make some fine-tuning to the portfolios now just in case.
But I don’t want to end on doom and gloom! The portfolios are quite robust and they’ve been proven to be robust so far. One of our main mandates, prime directives is to really not to put clients in a position where they feel that they’re going to be wiped out, and that hasn’t happened even though the wider markets have fallen a great deal so we just keep doing what you’re doing and take a cautious view and remain adaptive.
You are weathering the storm well, during choppy times!
Yes, so far so good.
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 recognized 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 wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.