#7 🔊 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.
Very good to be speaking to you today. It’s Nick Griffith asking some of your most popular questions to Austyn Smith. We are sat here on Thursday the 23rd of April, 2020. This afternoon we’re going to look at some of the recent developments with what’s happening in the US and the Federal Reserve actions, and also we’ll be discussing how you’ve been reviewing the asset allocation for some of your clients.
So let’s jump in. So Austyn, the Federal Reserve recently announced trillions more as an additional stimulus package. This is already more than 2008. So what do you think this all means?
I think with the most recent stimulus packages that America has launched, they clearly feel that it’s worse than 2008, and it probably is. We’ve just had this afternoon’s US jobless figures through, which is a pretty horrible number. They say that 26.5 million people in America have lost their jobs over the last five weeks, and that’s about 16% of their workforce. So it is pretty horrendous, and then today as well in Europe and the UK, there’s been lots of data saying that things are not very good. However, underpinning that, the Federal Reserve in America has stepped in, and this is very important in terms of why we perhaps haven’t seen the markets go down further because in the last crisis the Federal Reserve had to step in and buy certain assets, certain types of fixed income and corporate bonds.
And in this crisis, they’ve actually gone a lot further and they’ve had to step in and buy what’s known as high yield debt or junk debt, or high yield bonds or junk bonds, and these are assets that normally the Federal Reserve wouldn’t touch with a barge pole. So they’re clearly having to throw the kitchen sink at this. I think part of the issue has been that some of America’s major corporations have been re-rated down by the ratings agencies to junk status, and so they’re having to protect the whole corporate bond market by stepping in. In effect they are saying that we will support it and we’ll buy up the debt of these companies and support the market, and that really is unprecedented. So it says to me that behind the scenes … and we can’t always see what’s going on because we’re not privy to that information, … there must’ve been some pretty nasty things going on during the month of March, as otherwise, they wouldn’t have stepped in, to this level of magnitude, unless they really had to. So that’s what’s giving a degree of support to markets at the moment.
Interesting. Now I think you’ve been reviewing asset allocation for your clients. Can you tell everyone a little bit more about that and why?
We’re known for being cautious, so we’ve always tried to do that sort of work for people, and in the past, we’ve held a little bit more cash than other people. Historically corporate bonds would have been held as quite a defensive position in portfolios, but because of the reasons I’ve just mentioned, you’ve got a lot of companies around the world, that two or three months ago were regarded as the major multinational corporations, and of course with a global shutdown, what was a great business can get into cash-flow problems. So you have a potential liquidity issue, which if not looked after, down the line could turn into a solvency issue, and I think that’s been very much on the minds of the fund managers that I read about or speak to.
So they’re having to completely re-look at their portfolios at that level, and ask themselves, what are the sectors and what are the places I want to be in over the next 6 to 12 months? Because they have to be resilient, they have to have cashflow, and they have to maintain their ability to raise money, because if they can’t do that, they get into a liquidity issue and then a solvency issue. So in terms of publicly quoted companies, that not only affects their share price, but it also affects the price of their debt, which is the corporate bond market, and that’s why in March we saw the price of corporate bonds almost full as much as the stock market. That is almost unheard of, and certainly didn’t happen as much in 2008. So what that means is that a lot of people have had to look at their asset allocation. This is the ingredients in the cake, the things that are going to make it work? And so there were certain ingredients in the cake that worked a few months ago and they don’t work as well now, and so you have to adapt and rearrange things.
I think we are entering into a new normal, but what do you think will be the essential criteria that fund managers would be looking at?
I think it comes down to what I would loosely call ‘essentialism’, because I think we are going to be having a slow and gradual recovery, and so fund managers will be looking at what’s essential, what are the companies that are going to be essential in the new world. The problem that they have at the moment is that there’s a lack of visibility because a lot of the big companies who are quoted on the stock market haven’t given any guidance because they’ve got no visibility. So they’ve suspended all their forward guidance, but what we can see is that the airlines are really a leading indicator of what’s going on, and the problems that they’re having is that they’re burning through their cash, because they’re not allowed to operate.
And then they’re having problems as to how much money they can raise, and just this afternoon, Lufthansa warned that they’re going to run out of cash within the next few weeks unless they have a state bailout. So these are all issues which are going on at the moment and we can see it very clearly in the airline industry. Where we can’t see it very clearly at the moment is in the rest of the service and manufacturing sector, because all those companies are saying, “We’re just going to hold off telling you what’s going on because (A), we might not know, and (B), we don’t want to tell you because it might be worse than you think it’s going to be.” So it’s very much a case at the moment that fund managers and asset allocators are aware that by the end of this year or early into next, there could be some quite well-known businesses that are not the same. Either they’re part state-owned or they might be fully state-owned or unfortunately, they could have gone by the wayside.
Yes, it is clear there are some uncertainties and some challenges ahead, but we’ve also made great progress over the last few weeks, in terms of the lockdown holding, the rate of infection going down, and the Nightingale Hospitals. So how do you think the positives will translate once this is over?
I think that there are tremendous positives. Obviously the health issues need to be worked out first, and I think as I’ve said before, overarching all of this are the health issues. I think there is going to be some degree of self-isolation for quite a while, and no one knows for sure, but I’ve heard and read some things that there are some antivirals that could be available in the next few months and that certain types of vaccines are being tested all over the world.
So it could be that this all gets brought forward a lot quicker in terms of how quickly we recover out of this, and to a certain extent, global markets, the stock market is always looking forward. To a degree, stock markets are already looking through this because they know that the Federal Reserve is at their back and they’re already looking to next year and hopefully getting back to normal. Either that or they’re thinking, well the Federal Reserve has already committed so much that they’ll have to help some more if there are more problems to come. So those are the issues at the moment.
We will probably go through a transition and re-structuring to a new normal in the next 6 to 12 months. Some of the old companies won’t survive and there’ll be a lot of new companies and midsize companies coming through that are the new stronger, more resilient companies, and in a way that’s what you want for a stock market. So there are some positives out there, and also I think people are finding that working from home is not as bad as it might be, and that in certain things you can be a bit more efficient. Everyone’s using Zoom or Microsoft Teams these days and there’ll be some efficiencies there. So I think there’s a massive technological take-up globally going on at the moment, which is only going to help business in the long run.
Yes. From my observations, I think it’s true to say that it’s in adversity, the power of people to be creative and rally together, really is amazing and inspiring.
Yes. I think it’s always difficult when we want things to happen in the future, such as lockdown being lifted, and it doesn’t quite happen on time, and it causes a great deal of frustration. So I think it’s a good idea at this time to judge our progress by what’s already happened, and we’ve come a long way in the last few months, not only as a country but where the wave of infections is peaking in Europe. We were able to build Nightingale Hospitals very quickly, and so there is a lot of positivity out there if we want to look for it, and so I think that if we judge what’s happened, we’ve come through the last six weeks pretty well. And in terms of what we do for clients, we’ve been able to minimize losses in portfolios. So that’s been good, but we’re not resting on our laurels. It’s just so far so good, and we are well aware that there’s a long journey ahead, and we will manage that journey as best we can by remaining a bit cautious, possibly retaining a bit more cash than we used to, which then gives us optionality to drip feed into the market, and take a view on opportunities as they arise.
Thank you very much, Austyn. Thank you for your time and I’ll think you’ll join me in saying to everyone to stay safe and stay healthy.
Yes, and keep smiling as well. 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
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.