#20 🔊 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:

Austyn, good to speak to you. It’s our weekly Q and A. Thursday the 23rd of July. The year’s going fast.

Austyn Smith:

It is. It’s our 20th recording.

Nick Griffith:

It’s a good milestone. So I’m sure people are interested in what we’re going to talk about this week. So let’s get started. So going straight for the jugular here. Do you think we already have negative interest rates in the UK and perhaps the USA? What do you think? (…and what does that imply?)

Austyn Smith:

Yes we do. It’s more a technical thing, and where you see it written about, it really means are we headed into a recession or where markets think there’s going to be a recession. And so whilst interest rates both in the UK and in America are literally just above zero, when you factor in various other technical factors, we’re probably already in a negative interest rates scenario, and that’s really factored in by the bond markets, and the corporate bond markets. And there’s this sort of tug of war between investing in bonds or investing in shares. And at the moment the bond market is flagging quite a deep recession. And on the other side, shares are saying, all’s well, it seems okay at the moment. But as we know the recovery that’s going on globally is a bit stop-start.

Nick Griffith:

So one indicator (bonds) is saying deep recession, and equities are saying, all’s okay. Who do you believe?

Austyn Smith:

That’s a very good question. Historically, I’ve always believed the bond market as the best lead indicator, because stock markets can get frothy and get ahead of themselves. And to a degree you could argue where certain countries in the world where stock markets have bounced back, they’ve almost got ahead of themselves. They’ve got ahead of the real economy. So my experience over the last 25 years has taught me that when you’re looking at these two things, normally the bond market is the best indicator of what’s coming up. And that means that we’ve got to be wary of quite a deep recession.

Nick Griffith:

Interesting. And if we’re looking at the globe and opportunities, would you say there’s more value in Europe now than in the UK and the USA? And why do you think there is, I guess, why do you think that might be?

Austyn Smith:

Yes, I think certainly in the last few weeks, there’s been a lot of articles about the flow of money moving from America to Europe. And that’s partly because the American stock market is perceived in certain circles as being overvalued and it’s shot up too quickly. And so some big institutions are looking at taking profits in America and where the flow of money is going into Europe at the moment. And what is quite startling actually is if you look at the German stock market this year, year to date, so going through the nasty patch we had and where we are now, it’s just -1% year to date. Whereas the UK FTSE 100 stock market is down -17% year to date. There is a huge, huge difference. And this is down to various factors that we’ve talked about before, perhaps the UK stock markets reliance upon the banking sector, the oil sector, which has suffered, but I think it’s also to do with the flow of money.

And also that money, at the moment, is avoiding the UK due to uncertainties that have been going on the last few years in terms of where we are with Brexit. And this is not a political statement. It’s just that there is uncertainty. And I think globally money is being allocated where there is just a bit more certainty. And with the sort of record bailouts that Europe just finalized on Monday, 750 billion, that puts them in a good position. And it also puts them in a good position, in terms of they’ve recovered a little bit quicker from the virus than we have. Where Germany is pretty much back to normal in terms of going to restaurants and things. So there are little indicators and data that we’re seeing that reflect that.

Nick Griffith:

It’s interesting you mentioned certainty and confidence because that’s the bedrock of the US economy really. And what do you think the impact’s going to be, about things like the rhetoric that’s coming out with regards the US election and the very unstable infection rates, going on in the US?

Austyn Smith:

Yes, we’re beginning to see a ramping up in rhetoric between China and the US. I’d say it’s mainly coming from the US at the moment from Mr. Trump. And they’ve just closed down the Chinese consulate in Houston in the last few days. And they’re accusing the Chinese of harbouring a fugitive in the San Francisco consulate. So the rhetoric’s beginning to build up. And of course, we’ve had the Huawei business going on where basically Mike Pompeo, Secretary of State in the US, he’s going on a world tour basically telling all Western governments not to do business with China. So it’s really ramping up. And at the moment, markets are not taking the bait because they’ve seen this before.

But the danger is, is that there could be a tipping point in the next few months where this ramps up even further. And there are lots of tipping points that I’m seeing in the data at the moment, not just on this US-China issue, but on various other issues, we might just touch upon. Eg Re the general election coming up in November in the United States and fears that if Trump loses, he won’t move. That’s beginning to filter into people’s reports that they’re worried that if he does lose he won’t leave office straight away. He’ll hang on and he’ll say, Oh, well, it’s interference from China or interference from Russia. And so America is becoming a little bit uncertain at the moment.

Nick Griffith:

If we’re talking health data, I think there are some interesting statistics, re the R number in the US. And is it a case to say the recovery in the US economy is already over?

Austyn Smith:

Yes, we’re all always looking for leading indicators and insights. And we look at various indexes. We’ve all become accustomed to the R rate, or the rate of infection. It’s really growing a lot in America, Florida and California where there’s big problems. But we’ve also seen a lockdown in Melbourne and also in Catalonia, Barcelona as well. And I think that what’s quite striking is that this R number is above one in 45 out of 50 US States. And that’s huge. So the US recovery has happened a bit in May and June, but we’re already beginning to see again here that there could be a possible tipping point in the fact that if this R number just keeps creeping up, there are potentially more issues coming along down the road.

So there is a slight loss of momentum in the re-opening of the US. And again, another lead indicator would be US Consumer Confidence Index. And that had begun to go up in May. And now it’s beginning to come down again. So all of these things are indicators of how quickly is the US recovering. Perhaps it’s already had its first burst of recovery and it’s going to pause, or is it going to fall back again? And then how does that affect investment strategy?

Nick Griffith:

A lot of numbers to bring together. And just bringing things back to home, have there been any further developments in how we are going to pay for all of this? Because it’s going to run into several hundred billion pounds.

Austyn Smith:

Yes, so we mentioned last week there’s going to be a review to capital gains tax rates, which are low historically at this point in time. There’s a consultation period and that’s going to be released in October. And so perhaps around that time, we’ll get a handle on how much capital gains tax is going to go up, because I do think it will be going up. The other thing I’ve read in the last week is that there’s now going to be a review of tax relief on personal pension contributions. And this is where again, a very large saving could be made, in reading a Financial Times article this week, apparently the tax relief bill that HMRC has to pay each year is 38 billion pounds. So that’s a huge savings.

So what we might find at the end of the year, or when the budget is in October, they might begin to say, well, actually we need to save some money. So maybe for higher rate taxpayers, you won’t get higher rate tax relief on your pension contributions anymore. Everything will be done at basic rate. And then there’ll be able to save quite a lot of money.

Nick Griffith:

Well there’s a lot going to happen in the next two or three months and the next part of this year. So with all of this data flowing it strikes me, you amalgamate some of the key indicators. It’d be great to hear a bit more about the process you use, in bringing those together, and making a summary judgment.

Austyn Smith:

Yes, in terms of the process, what we’re looking for is insights and lead indicators. And generally you get those from the various indexes that are published. So it could be a Consumer Sentiment Index or Consumer Confidence Index. It could be what we said last week, the PMI, the Purchase Managers Index. It could be the Economic Activity Index. And all of these things point to what’s going on underneath in the real economy. And they’re really useful at this point in time as we are looking at how quickly the recovery is happening. Some of the data that you can access relates to how many people are going out for a meal. So ‘Open Table’ is one of those apps on the iPhone where you can book a table to go out to a restaurant in. And in Germany, they’ve seen a massive uptake in people going back to restaurants to such an extent that it’s pretty much back to normal.

Whereas the same data for the United States shows that in fact that they’re still down 60%. So again, there’s a massive divergence there, and that’s possibly why there’s a flow of money going back to Europe. But as such, it’s not hitting the UK at this point in time. And obviously we’re watching that. And when we think that actually yes it’s worth going back into certain UK areas, then we can do that. But there’s just a bit too much of uncertainty in the UK, just at this point in time.

Nick Griffith:

It strikes me that you’ve got your own amalgamation of different indexes and you’re bringing them together under one roof to create your own.

Austyn Smith:

Yes, we have this process called Cautious Blend ®, which is our ethos and philosophy and it is, if you like, a Cautious Blend ® Index. And so we amalgamate it altogether and have a traffic light system. So are we red, amber, or green? And obviously red, we were very much in the red, Safe Harbour Planning ®in March and April. And then as we’ve slowly seen a recovery, we’re back to amber. Are we heading for green? Well the jury is still out. And it really depends upon some of the global things that we’ve talked about. So amber to me means that we’re still flashing cautious. And if some of these indexes tilt a slightly different way, that’ll tilt us back into red.

So yes, we’ve tentatively changed portfolios and they’re doing reasonably well. And we’ve allocated a bit more into Europe and into the Far East, because we want to expand our proportion in equities. But we still have to be a little bit cautious. So we still do retain cash in portfolios and the defensive things such as fixed interest and corporate bonds. And then we blend those together the way that we think it’s going to work best for our clients. A Cautious Blend ®

Nick Griffith:

Thank you, Austyn. I think there was some positive news with regards to vaccines.

Austyn Smith:

Yes, last week we put a link into the email, that was a link to a Bloomberg article, which was free to read, and it was about the Oxford vaccine progress. So I’m going to put that on this email as well. And it’s just very interesting. There is a silver lining and it’s likely that there will be some form of vaccine by the end of this year, early next year.

And we’re all gradually adapting to life in the new normal. One of the big changes is that most of our meetings are online either on the phone or on Zoom at the moment. And I think just due to the nature of our clients, it’s interesting when I have conversations with them about face to face meetings, but no one’s in a hurry at the moment to go back to face to face meetings. But we’re all living with it ok.

We’re all getting on with it, and it’s business as usual. And hopefully we’ll all have a nice August. A little bit of relaxation and then come back in September. Because I do think these next three months are going to be incredibly important, August, September, and October, because primarily furloughs are winding down. So then we’ll begin to see what’s really underneath. We’re only seeing the top of the iceberg at the moment. We don’t quite know what’s underneath.

Nick Griffith:

Well, thank you very much for your time, Austyn. I look forward to following the trend and doing our next weekly call. Same time, same place next week. Thanks very much.

Austyn Smith:

That’s great, Nick. Thanks. 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.