Market Update – February 2020

You may have seen in the news that the stock market has suffered some fairly notable falls over the course of Monday and Tuesday. This is mainly in response to the increase in the number of Coronavirus cases across the world and in several new countries over the past week or so.

First and foremost, it is important to put things into perspective. Although the major stock market indices have fallen over the past couple of days, they have fallen from near record highs and so some element of correction is understandable in this kind of situation.

The second thing to bear in mind is the cause of the markets concern – mainly that consumers will be spending less in economies that are impacted by the virus and this is broadly true. However, the kind of spending that gets impacted tends to be consumer discretionary spending (new cars, holidays etc). Typically, this kind of expenditure gets deferred and not cancelled in situations like these, so most economists agree that the markets should get a boost later in the year when the virus has passed and people then make some of these deferred purchases.

Finally, we can look to history for some guidance in these situations (although keeping in mind the old adage that the past is not always a useful guide to the future). The graph below shows how markets have reacted to several previous epidemics. As you can see, the impact tends to be felt only in the short term, often with strong recovery only a few months later.


We are pleased to report that the Buckingham Gate Portfolios have held up very well in this environment. Over the course of Monday and Tuesday, the FTSE 100 fell by around 5.2% and the S&P 500 fell by nearly 6.7%. In contrast, the Buckingham Gate Balanced Active Portfolio fell by only 2.2%. This is as a result of the diverse nature of the portfolios, but is also a reflection of the fact that we have been very conservatively positioned for some time now in readiness for just this type of event.

We will continue to keep portfolios under review and may even use this period as an opportunity to take advantage of falling prices if valuations look attractive.

 

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Please note that investments can fall as well as rise and any income generated by an investment can fluctuate over time.

Educating The Next Generation Of Clients

Perhaps it is because my children are coming to the end of their primary school education, but I’ve become increasing aware of my responsibility as a parent to provide them with responsible attitudes towards money to help them through life. While they are beginning to understand the concept that things cost money, they are gradually realising that there isn’t a bottomless pit of cash buried in the back garden to pay for everything! Getting them to understand that saving the weekly pocket money to buy something that they really want is much better than blowing it all on a comic and sweets each week, is an important first step in encouraging them to adopt a lifelong saving mentality.

The Personal Finance Society is the professional body for the financial planning profession in the UK and they have recognised the importance of educating tomorrows savers, with the launch of the My Personal Finance Skills – a pro bono initiative to deliver financial education workshops to secondary schools and colleges across the UK. These workshops include topics such as helping students understand the value of everyday expenses, staying safe from financial scams and understanding the concepts of income tax and National Insurance once they leave school.

I volunteered to be an Education Champion, and despite a little bit of trepidation (there’s a reason why I decided to become a financial adviser rather than a teacher!) I took the plunge to deliver a workshop at a local secondary school just before Christmas. I have to say that it was a really enjoyable experience and was fascinating to see how fourteen and fifteen year old’s think about money – more than one were shocked about the cost of things such as household expenses and rent, especially when they were also informed about the difference between net and gross salary!!

This generation of children are fully immersed in social media and there is no doubt that they are heavily influenced by the lavish lifestyles portrayed by some celebrities. One of the objectives of the workshop was to make the participants aware of the income needed to maintain such as lifestyle, and the dangers of using easy borrowing in an attempt to live the “Instagram lifestyle”.

A number of clients have expressed their concerns over the years about the ability of their children to manage large amounts of inherited wealth, and last year we sought to set up a next generation workshop to provide financial education for young adults. While we didn’t have the level of response that we had hoped for, I’m sure that this will be a topic that we will revisit in the future.

New Year, New Markets?

The last quarter of 2018 was indeed challenging for markets with various factors combining to generate significant volatility over the quarter and some softening of market performance.

The biggest contributors to recent market performance have been the US / China trade war and resulting stop-start trade talks. In addition an unprecedented guidance adjustment from Apple, citing weakness in China, caused the company to lose both its much hyped $1 trillion dollar market cap and its crown as the worlds largest company.

The market clearly sees Apple’s performance as a proxy for other companies as the announcement cased a general stock market sell-off.

In the following weeks other companies have cited some weakness in trading, especially in China and many UK retailers are struggling with a weaker Christmas sales period as has been widely expected.

As we approached the end of our investment review for quarter 4, we saw a spike in volatility and as such delayed our review work by approximately 2 weeks to allow for a like-for-like comparison.

Over the holiday period volatility persisted and between Christmas and New Year, we saw some of the most significant moves ever recorded in US stock market history. Over the 3 months to the end of December the US Market was down by around 11.9% and the UK fell by around 9.5%. Given their diverse, global nature, the Buckingham Gate portfolios are behaving as expected and are significantly softening some of these losses.

As we have entered 2019, relative calm seems to have returned for the time being and markets are showing tentative signs of recovery, although it remains to be seen if this will persist.

Ironically, despite the near constant media attention, Brexit (or the potential lack of) does not seem to have caused too much concern for markets, although the weakness in the UK market compared to others over the past 12 months suggests that much of the current uncertainty is now priced in.

It remains to be seen if any further clarity will be delivered by the parliamentary vote over the coming weeks or if (as is expected) a ‘no’ vote takes us back to square one in the Brexit process.

The Buckingham Gate investment committee will continue to monitor events carefully, however we don’t see that the events of the past 3 months are particularly unusual or unexpected.

The past decade has seen record breaking growth in most major global markets and so some easing off is to be expected. In addition, despite much media commentary about high volatility, the level of volatility we are now seeing is almost exactly the average. 2016 and 2017 are actually the exceptions to the rule given the extraordinarily low levels of volatility seen over these 2 years.

The largest indicator of a more permanent downturn in markets is a recession and although there has been some softening of data in some markets, recession would seem to be a way off at present.

There are some potential upsides to bear in mind. Brexit might not be as damaging as some people expect, the US and China could quickly rectify their troubles and retailers could quickly turn things around.

We will be managing the portfolios with our investment partners cautiously, taking into account the market environment we find ourselves in.

We would like to wish all of our clients and contacts a very happy and healthy 2019!