#18 🔊 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:

It’s Thursday, the 9th of July, Austyn Smith, talking to Nick Griffith, doing our weekly Q&A. So a few questions to get through, looking forward to getting stuck in. So Austyn, after yesterday’s announcements from the Chancellor, what impact do you think the £30 billion stimulus will have on business and the economy?

Austyn Smith:

Yes, it’s very encouraging that our Chancellor has started to build in some measures for the real economy, because I think up until yesterday, a lot of the stimulus measures had been for the big financial institutions, but now we’ve actually got some creative ways of trying to help the real economy and real people. But I do feel that it is just a step. It is the first step of many, and so I think initially the things that have been designed, are for the lower paid, and that’s obviously a good place to start, school leavers and apprenticeships and that sort of thing. So I’m thinking that that is a very positive step, but I think there’s going to be more in this autumn in the Budget. And I think there’s going to be more as well around December, January time, and even as far away as Easter. I think this is just the first step of many.

Nick Griffith:

Yes, I think in stages. And what is the danger that you think that quite a few of these government measures are just delaying or kicking the can down the road, and there might actually be bigger problems coming in the next three to six months?

Austyn Smith:

Yes, I think there is a method in their thinking in that, yes, there is an element of pushing the day of reckoning down the road a bit. We’ve had all sorts of things like payment holidays on mortgages and credit cards and car loan repayments. And of course it is just piling up debt and pushing things a bit further down the road. And I think the thinking behind it is, is that they hope that some momentum will begin to develop in the recovery of the real economy between now and say the autumn. And so they’re just waiting and seeing, and then I think they’re going to be reviewing this pretty much every three or four months, because as we’ve seen today, Boots and John Lewis announcing further job cuts despite what Rishi Sunak said yesterday.

And of course these are bellwether businesses and it’s very, very unusual to have someone like John Lewis closing stores; I believe eight stores and laying people off. And so I think as Rishi Sunak said today on the radio and on the television, his words were that ‘we’re heading into the severest recession that we’ve ever had’ and if that’s the case, then in my lifetime, that’s going to be worse than the early 1990s and when I was very small, could even be worse than the mid 1970s.

Nick Griffith:

If it’s been a few decades since a very severe recession, which means many people won’t remember it and the impact it has; what impact do you think that could have on behaviour?

Austyn Smith:

Well, I do think that there are lots of people that, as you say, haven’t lived through that sort of thing, or maybe they’ve forgotten about it. I mean, I’m old enough to remember certainly in the early nineties, negative equity. And I think a lot of people haven’t gone through that, and struggles with the real economy and companies downsizing. So I remember in the early nineties, a lot of the large companies were downsizing their middle management and I think that’s the trend that we’re beginning to see, certainly in America and in the UK now is that the original unemployment problem has been perhaps people in hospitality and leisure and travel, which might be the lower paid people in certain cases.

But now it’s creeping up into the larger businesses and all the way through the ranks as it were. And I think we haven’t unfortunately seen the worst of that yet. So there is some hardships still to come on that basis, which obviously we hope it’s not going to happen, but I think certainly the Chancellor is beginning to prepare for that. And that’s why I think there’s going to be more stimulus for the real economy to help people in whatever ways they can come up with, in the next few months.

Nick Griffith:

Yes, and is risk changing? If we were talking low, medium and high risk in 2019, and you’re talking low, medium and high risk in 2020, how do you think that has changed?

Austyn Smith:

Yes, bringing it all back down to what we try to do for clients, it’s managing risk. There’s been a big shift, because low risk or lower risk investing in the last few years has been things like gilts, bonds, fixed interest, that sort of thing. And those have really gone up a couple of steps on the ‘Risk Staircase’, if I can use that analogy. So a couple of years ago, you might think of those assets as lower risk and if the stock market falls or something else bad happens in the world, they won’t really change that much or they might go down 1% or 2%. But what we saw in March was that those asset classes went down by as much as 10% and that was a big shock to the system, because we’re in a different dimension now really, we’re in the dimension of this pandemic, which has obviously changed things.

And so you get a situation where, if people have to sell assets to pay for something, perhaps bets that have gone wrong, sometimes it’s the safest things that they sell. And of course, if you’ve got forced selling, that just creates downward pressure on those assets. So what it means is that what was low risk last year, has effectively become medium risk this year, and what was medium risk last year, has effectively become high risk this year. So everything has gone up a couple of notches on the ‘Risk Staircase’ and that’s the issue that we’re all having to face.

Nick Griffith:

And yes we are in stormy seas, and I think the description you use, is keeping in Safe Harbour. But do you think there is a safe alternative to cash investments, whilst keep things low risk?

Austyn Smith:

Yes, that is the problem. In years gone by, the next rung up from cash would have been fixed interest, it would have been gilts, it would have been corporate bonds, it would have been high yield corporate bonds and going up the risks staircase with equities and shares at the top. And then of course they’re in their own staircase because maybe UK shares are slightly less risky than say Japan shares. So there were options last year, but this year it’s changed. And so the reason we have a little bit more in cash at the moment is A, to keep a bit of optionality so that we can deploy capital if there is a second wave and if stock markets go down again, but B, because the only other alternative would be going into fixed interest and bonds and we have started to do that, but I’d rather do that slowly and gradually, because again, it’s trying to find the right places to put assets that are going to give a return, but without too much risk. And that’s the dilemma we have at the moment.

Nick Griffith:

I guess it’s slightly decoupled, but looking at opportunities, some technology firms are flying high, like Tesla. So there’s the question, why not join the technology wave and what are the risks, and could the music be about to stop?

Austyn Smith:

Yes, we were talking earlier, some parts of the market have become a gamble or a bet. And actually the language has changed over the last few months. And this is even in the Financial Times and Bloomberg, where commentators are using those terms of what can we ‘gamble’ on next? What are you ‘betting’ on? And it’s like, well, surely we’re in the game of long term sustainable investment. We’re not in the game of betting or gambling, but this is what’s beginning to happen. Certainly in the American stock market where the main winners are very funnelled into this technology space, and there are probably only about 10 companies in that space and all of those companies have had a very good run of late, and that’s great, but that’s because people are funnelled into this area, because there’s no alternative.

And then you think, well, if all of this is going on, it’s great. But when does the music stop? Because as we all know from our childhoods, when you play that round of musical chairs and each round, someone takes a chair away, very soon you’re left with nowhere to go. And the American market is behaving a bit like that because if you take out the technology stocks from the American stock market, well, it’s pretty lackluster. And we talked last week about the UK stock market being in the doldrums. And it’s actually the worst performing stock market in the G7. It’s even performed worse this year than Italy and I think that’s because it’s heavily concentrated in oil and banks, which obviously have suffered quite a lot.

So yes, there are places in the world such as the American stock market that’s doing better and we do have exposure to that. But again, it’s how much do you allocate into that? When you look at it and you think, well, hang on, this curve is almost going vertical. It can’t go on like this forever. And so it is a game of musical chairs to a degree, but at the same time, we’re cautious. We don’t want to take any gambles with people’s money.

Nick Griffith:

And if we’re talking about the curve, what industries and signals are you waiting to see recoveries in, to really feel a grassroots recovery, that the tide might have turned into real growth, and not just this speculation.

Austyn Smith:

Yes, we’ve talked before about airlines, travel and hospitality, and they really are a lead indicator as to how well the economy is coping with COVID. And as soon as we can see that travel, hospitality, and leisure are getting back to near normal, then you’re going to feel a lot safer, but I still think that that’s some way off. And so in the interim, yes, you have speculation in certain areas, but in terms of a wider recovery for all sorts of different sectors and markets, you would really have to see some momentum in that area because, there’s still a lot we don’t know about the future of earnings, whether it’s the companies in the UK or companies in Europe or America. And I’ve heard some of what’s going on in America be described as ‘short term animal spirits’ in that there is this sense of missing out on a stock market rally.

But that rally is incredibly narrow in just a few technology stocks. And yes, it’s helping support and bring other things forward, but if something were to happen to those technology stocks, that would… perhaps someone wakes up one morning and thinks, well, this has gone far too much, too long and starts selling, it creates then that downward momentum. And it’s almost as if the stock markets around the world have gone from being flawless, then to being hopeless again in March and April, and now they’re flawless again. And as we know, they’re not flawless, there’s a lot of problems that could mean the stock markets catch a cold.

Nick Griffith:

Thank you Austyn. A lot of interesting points this week. Just very quickly, what do you think are a couple of the main takeaways for this week?

Austyn Smith:

I think the main takeaways are that yes, we are looking at ways of deploying some of the safe haven assets we have in the portfolio. We’re always looking at ways of allocating to obviously try and increase values, but sometimes that’s tempered by the thought that actually, when is the music going to stop? Because it does feel a bit like that at the moment, and the reason markets are being supported is through all the stimulus measures that are going on around the world and that’s going to continue for a bit. So you could argue that some of this speculation and frothy markets is going to continue, but we have to be also mindful of the fact that we’re not here to gamble and trade in the short term, we’re here to actually try and make sustainable decisions about where we allocate to, and that’s what we’re going to continue to do.

And so far so good. I think we said last week that we’ve managed to reach the midpoint of the year relatively unscathed. So that’s already ahead of most of the stock markets around the world. And so in one respect, you don’t suddenly want to throw that out of the window. You want to try and manage that moving forward and I do think that it’s a bit like we’re in a bit of a storm at the moment, but the sun is shining maybe 50 miles over there if you’re looking out to sea, but we can see that we’ve still got some dark clouds to get through.

So I think we still have a way to run, but we’re getting there. And I think there will probably be a vaccine by the end of this year, early next year. It’ll take time to roll out, so hopefully things will start to get back to normal next year. So I think that’s my pathway that I’m looking at, but I still think we’ve got a tricky six months, especially as infection rates are growing in America.

Nick Griffith:

Thank you very interesting Austyn. Thanks very much for your time this afternoon, look forward to next week.

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.