#13 🔊 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.
My name’s Nick Griffith. It’s Friday, the 5th of June, and I’m sat here interviewing Austyn Smith for our weekly Q&A to cover the latest developments and your insights into what’s happening in the world and markets. So let’s get stuck in. It’s been a choppy week but we’re seeing rises in the stock markets, and there’s a real disconnect with that and thousands losing their jobs in the economy. I’m just wondering, how would you explain this disconnect between what’s happening in the markets and the economy?
Yes. What we have is some stability in the stock market and actually we’re ending the week on a high, which is nice. But the stability in stock markets doesn’t reflect the job losses or the insolvencies that we’ve had already or that could lie ahead. I think there’s a lot of things that I’ve read over the last few weeks that talk about this disconnect or complete dislocation at the moment and we can put it down to a number of things. It could be down to some short-term speculators, the big institutions trying to make some money this year before things get too worse as we come into the second quarter earning season in July, or possibly before things get worse later on in the year when the furlough schemes finish. Certainly, you can’t really deny that many people have lost their jobs, businesses are struggling, not just in the UK, but globally.
The American stock market at the moment is almost behaving as if Covid never existed. And that doesn’t sit comfortably with me. And I think it comes down to the fact that in America and globally, a lot of money has been spent to support the economy. But a lot of that money has gone into pockets that have actually supported the stock market. And in America, the Federal Reserve is not only the lender of last resort, but also behaving like the stock market ‘backstop’ of last resort. And it’s created something called ‘moral hazard’, where, if large institutions feel they can speculate and put money in the market, without there being too much risk, because the Federal Reserve will bail them out, then they just end up taking more risk.
This can be a short-term phenomenon and might mean why the stock market’s are going up. But at some point, it’s not necessarily a sustainable pattern, because of course, we don’t yet know what the full effects of Covid are going to be on the economy, on companies, on individuals, is there going to be a second wave?
So most recently in America, the infection rates are creeping up again. So, there’s a lot still to play out. There’s a very delicate balance between allocating more capital into what could be quite a short-term bullishness going on at the moment. And on the flip side of that, worrying a little bit about what’s still to come because there’s still a lot of unknowns out there, and we can talk a bit more about that.
Yes, I think in terms of looking forward, trillions across the world are being put into stimulus packages, the US putting in a good few trillion already, but one of the questions is, how long do you think these stimulus packages are going to last and what happens when these stimulus packages eventually fizzle out as they will?
Yes, in America today, they’ve had a surprise in that unemployment has slightly dipped and that’s puzzled many people. So, there could be some discrepancies that come out in those unemployment figures in the next few weeks but it could be down to something as simple as their furlough schemes are now ending, people are being put back onto the payroll, so it looks like they’ve been re-employed or gone back to work. Under the American system, you can get rid of people really quickly. They don’t have the same employment rights as we do in Europe.
So, just because there’s a slight positive sign, that’s great. But when I think about that, I think, “Well, okay, that’s a short-term thing.” I mean, you’ve got to respect markets and markets are looking at that as a positive because it is a positive. But it’s one data set in a number of data sets, and the vast majority of the other data sets are not very good because obviously, the economy is being shut down. So, there is this push and pull between those who believe and who want a ‘V’ shape recovery. And then within that group, they might be those who are just speculating in the short-term, take some profits mid-year and then park it for the rest of the year because that’s when they believe problems are going to start.
Or ourselves, we’re looking at both sides and trying to take a view as to, “Well okay, so far so good in the first five, six months of this year,” and where we have managed that risk. As clients know, we’re in the business of making sure that people have protected their downside. We’re not so much trying to make a quick killing on markets. It’s very much a case of trying to protect people and their wellbeing at this point. But having said that, we are considering deploying some capital and, I think you have to be very nimble and we will have to be very adaptable in the next few months.
And so, how quickly could we normalize? Well, that’s an experiment that’s going on globally at the moment. It still comes down to the market’s best guess though, because no one knows how quickly people are going to start taking international flights, no one knows how quickly children are going back to school, no one knows how quickly everyone’s going to go back out to restaurants, and even when the restaurants open, perhaps they’re only at half capacity.
And how confident will people be in meeting up?
Well, that’s an important point. And so, it’s a difficult one to understand sometimes when the stock market goes off in one direction when there’s so much bad news elsewhere. Sometimes, there can be technical reasons for it, where people are having to cover positions by buying shares in the market to cover short positions. But I think at the moment, markets are looking at each week, looking at what the data is and then taking a view. But if we go back to just a few weeks ago to March, world stock markets were shifting 10% daily.
Or 11%, wasn’t it I think? Some days were extreme.
And this was only a few months ago. And so, if we do get a second wave or if we do get some bad economic news that perhaps the corporate failures are worse than people are expecting, that ( volatility) can happen again. And so, it’s very much that delicate balance of yes, we want to try and progress portfolios, but we don’t want to get into a situation where we get caught the wrong side of that sort of scenario. It happened a few months ago. It can easily happen again.
Well, nobody knows for sure what the future holds. And there are clearly some large risks and uncertainties out there. So, how do you package them and reflect them into a sort of general strategy or a board strategy?
Yes, I think at the moment, the equities in client portfolios are doing really well. So, we will have seen over the last few weeks, valuations increase. The interesting thing is that there might be some slight profit taking at the midyear point if this continues and reallocation of those profits. So just being quite careful at this point because some of the things I’m reading are that a lot of the big institutions are actually beginning to think that the second half of this year will be a lot worse and could go down to the March lows again.
So, that would indicate a ‘W’-shaped year. So, if we can get to the midpoint of the year relatively unscathed, then so far so good, which I think we’re on target to do. But then, just be careful that we don’t get caught out again by perhaps another downdraft. Now, I don’t know and no one knows if there’s going to be another downdraft but you certainly have to have it as a consideration and allocate your capital, perhaps just a little bit more cautiously. No one can predict the future but you can have a little bit of preparation and thinking time in terms of how you deploy capital.
I think growth is going to be inconsistent, it’s going to be very stop-start, it’s going to be quite slow when things do hopefully get back to normal. So, it’s almost like markets are not fearing a loss. Now this is mainly in the American market because the Federal Reserve have put in a backstop, but of course, that then encourages risk taking in Europe as well. So, it’s a case of watching the Federal Reserve, watching what they’re going to do. Are they going to continue stimulus? Are they going to pump more money into the system? Because one of the problems is that the money they’ve pumped into the system is more to support the stock market than the real economy.
And we’ve already seen with other events in America and globally, the Floyd demonstrations this week, that there is a lot of potential unrest with the American system in particular. So, they have a massive responsibility to make sure that the real economy does recover. And at the moment, we’re not quite seeing that. Certainly in the UK, it’s a bit better. And I saw some reports recently that talked about apprenticeship schemes, which is going to be a great help.
So, there’s a long way to go and I think it’s going to be stop and start. I think even though the stock market’s risen a little bit in the last few weeks, I think we’ve still got more volatility. I think on the opportunity side, there’s still going to be times where we will want to buy into the market. Care is needed because, do we see this as the start of the next great bull market? And I think the answer is no. I don’t think we do see that because we’ve still got a recession, we’ve still got unemployment and we’ve still got health issues. So, these things we will have to factor into things and just tread carefully, I think.
Thank you, Austyn. I think two things are for sure, we’re entering into a new norm and a lot can happen in a week. So I look forward to re-joining you next week for more questions.
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 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.