#12 🔊 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 the continuing unprecedented events.

Link to Audio Recording

Nick Griffith:

Good to have you on our weekly Q&A. It’s Thursday, the 28th of May 2020. So thanks for everyone’s questions, we’ll just jump straight in, I think, today.

One of the questions is about the ‘disconnection’ between the stock market and the actual economy. Is it now disconnected from what’s happening in the economy, and what does that mean for investment strategy?

Austyn Smith:

Yes. Well, that’s the bottom line isn’t it, investment strategy? My current thinking is that because there’s been so much stimulus around the world led by the Federal Reserve in America, that it’s this really supporting markets at the moment.

And so I’ve been asked, with such bad news in the real economy and lots of unemployment globally, and still countries around the world dealing with the virus, why is the stock market where it is?

It’s held up quite well, and over the last few weeks, it’s gone up a little bit. I think this comes down to where stock markets are looking forward over the next six months. They’re taking a view at the moment things are going to get better and so they’re supporting things in that way. And also there’s this backstop that governments around the world have given the stock market. By that, I mean, the stimulus measures, the furlough measures, and support.

And so these things together are helping the market stay where it is and drift up. And of course, the question then perhaps to ask is, what happens when the furlough schemes finish?

What happens when central banks try to ween the general population of this sort of thing, what then happens?

And of course we don’t quite know yet, but obviously that’s probably when the stock markets will react adversely. Or indeed, as we’ve heard just in the last few days, where America and China are thinking of picking up their spat again, in terms of trade tensions, mainly triggered by Hong Kong. So there’s a lot going on at the moment.

Just because the market is self-supporting at the moment, it doesn’t mean that the bad things have gone away.

Nick Griffith:

Yes, I think you said something interesting in our pre-call, which is, “We’re in the same storm, but we’re not in the same boats.”

We could be looking out the window at a sunny day and think this a good day, but there are plenty in the UK and globally feeling a lot worse. In that global perspective, particularly the UK, do you think it’s a recession, or do you think we’re actually heading towards a severe recession, or are we talking depression?

Austyn Smith:

Yes, this is another question that comes up. I would say certainly that we’re in a recession at the moment in the UK. In terms of a severe recession, I would say that, that will be determined in the next month or two, mainly as furlough in the UK is phased out. And we think that through the summer we’ll know that the actual amount of government support will gradually reduce through to October. And it’s really only by that time that we might have a handle on how much unemployment there is in the UK, because I tend to associate a depression with mass unemployment. And so we’re not at a depression at the moment because we haven’t got the mass unemployment, but we’re already seeing the airlines as a lead indicator making redundancies.

The other thing about the airlines is that they’re also a lead indicator for the global economy. And so when these companies say that they don’t think they’re going to recover for another couple of years, in all likelihood, that probably means that the global economy won’t fully recover for a couple of years.

So, the other question that I ask myself is that even as we reopen the economy, will those same jobs be there for people and, what’s going to happen to the people that have already been made redundant. So there’s a lot of unknowns still out there.

And so just because it might feel that we’re in a little bit of a lull, or a little bit of a bubble at the moment, there’s still a journey to go.

Nick Griffith:

The world is unsafe and unpredictable, and I think there’s a little bit more in terms of how you think and your strategy or process. I’m interested to hear that, and I’m sure others are too.

Austyn Smith:

Yes. I’ve thought just in the last few days, how much do I attribute to the market’s wishful thinking, where the stock market has been creeping up a bit. And I have to take notice of that, but I also have to make sure that my clients stay safe in monetary terms and that we’re helping them protect their downside.

So there is always this balance. But, how I think and how we formulate strategy is really important because ultimately we’re concerned for our client’s wellbeing and that’s obviously their monetary wellbeing, but especially at this time, because COVID will affect some of us.

And if it hasn’t affected some of us already, it will possibly do so over the next six to twelve months. And, in past times of financial stress, that’s one thing, but where you have financial stress coupled with a health stress, that’s a different environment.

And so I’m very aware that, we’re helping people not worry too much about their money. And so if they have to worry about a health issue, then obviously they can give that their full attention. Protecting people’s lifestyle, reducing their anxiety in terms of how we manage money is really our style. And that’s how the cautious approach developed really.

And, in terms of how we think about things, there’s a lot of testing that goes on not only in terms of the funds that we’re picking, but also in terms of our own thinking. And you mentioned already Nick, that the world is unsafe and unpredictable and just because the market’s holding up, it doesn’t mean that the world has stopped being unsafe and unpredictable. It’s just that it’s being supported in a certain way that could change over the next six months or could reduce.

And so, we have to be careful that we take a step back, and I think that’s really important. And we test and we think about things.

One of the first thing is that we always try and have an open view. And then we try and question our thinking and why we’re picking certain funds and why we’re allocating a certain amount to a certain fund. And that’s really to test our own thinking. Maybe we deliberately create a bit of doubt in our own minds, because then we have to reassess. And of course that then stimulates our own independent thinking as to, how we’re doing things, because that’s the way you get different ideas and you get innovation.

And I think that is what we’re known for because our strategy will be completely different to many others out there. Yes, it’s safe. And yes, it holds a bit more cash at the moment, but the thinking behind it is different. And the thinking is based upon this filter of safety and predictability. Now I know we can’t control that and we can’t control the world and the markets, but we just see it through that lens. And that’s what we’re really trying to do, just to keep clients, financial assets as safe as we can, at this scary time.

Nick Griffith:

And in terms of a process or a journey, we’re going on, and with the economy now, in your own opinion, where do you think we are? Are we half way through, are we at halftime, what’s your view?

Austyn Smith:

This also really plays into strategy and how you deploy capital. And I’m currently going through that thought process for our June rebalance. And we are looking at deploying a bit more capital into markets just in the short term, because we are probably in a slight lull. I don’t know, if it’s half time yet to use a football analogy. We might just be in the first quarter because this is a long journey.

I think that from the health point of view, things have got a lot better in Europe. And so there is this reopening and of course there is optimism in markets. And so I’m thinking, well, actually we should probably take a bit of advantage of that, but how long that will last before the next wave of infections comes, nobody knows. But possibly there will be a lull, possibly we are in the eye of the storm as it were, where it’s slightly calmer for, four to six weeks, could be two months. And so, maybe in that timeframe markets do stabilize a little bit, possibly go up a little bit. So, we are looking at slightly changing around some of our positions to take advantage of that.

From what I’ve said already, I think you’ve probably gathered that the overview is still cautious because, we probably are only at half time. So whilst we’re all in the same storm, we’re all in different boats and it’s easy for me and for a lot of our clients to look at the world at the moment with the sun out and the blue sky and think the world is quite rosy, but we won’t really know the full effects of the economic damage for another few months in terms of companies going under or in terms of mass unemployment.

That’s where, the real economy will catch up with the stock market economy.

There’s this ‘Operation Birch’ that the UK government has announced which is to bail out specific companies that are essential to the infrastructure of the UK. And so that might entail an airline or say a utility, or something like that. So that sends to me a signal that the government is already thinking forward six months to say, look, we’re going to have to end some of these support measures in six months. And then the crunch time will happen because, we’ll have to decide who we rescue and who we don’t rescue. And that’s when it could get, if it hasn’t done already, that’s when it could get quite messy.

So, we’re aware of that. We’re aware of managing the journey and so yes, possibly we’re at half time and, the Brass Band is playing and we can all go outside for an ice lolly. But unfortunately, I think there is still a battle ahead.

Nick Griffith:

Thanks, Austyn. In summary what do you think are the three quick takeaways from today’s call?

Austyn Smith:

I think the takeaways are that firstly, as clients know, we’re cautious and, we’re looking through a lens of safety and trying to choose things based upon a little bit of predictability, which of course is quite difficult at this time.

But we’re also looking to refine our strategy and we’re always looking at ways to innovate and to choose slightly different paths that we think can get some growth, but without too much risk, I think that’s the key at the moment. I take on the view that yes, whilst I’m experienced, you’re continually learning in this type of environment.

And, then thirdly, I think whilst we all are perhaps in this slight lull that we use this to replenish our reserves, because we’ve all gone through a lot. It’s really important to keep this sense of community and family that we’ve developed over the last few months.

So it’s very much a case of keeping your eyes on things as far as I’m concerned and being adaptable. And yes, we might be in a lull and it could be halftime, but we’re still preparing for what’s coming up. The likelihood is that there’s still more to play out in terms of the vaccine and COVID and everything else that’s going on at the moment.

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.