A Message From Matt – 12th June 2020

I had planned to write a somewhat jubilant update today as stock markets around the world have recovered, in many cases to now show positive gains during 2020. Some markets have set new all time highs in the past few days! When you consider what the world has been through over the past few months, that really is quite extraordinary.

As hard as it is to believe, the ‘crash’ only really lasted 3 weeks – most markets started falling on around the 20th of February and hit their low points in the middle of March. Since then, the general trend has been one of recovery and I was all set to write about the old investment rules (time in the market, not timing the market) proving their worth once again.

I was even tempted to add in a sprinkle of ‘told you so’ pointed towards the media who were prophesising Armageddon during that 3 week period of market crashes, but who have barely mentioned a word about the spectacular recovery since then. Even in the height of the crisis, our advice to investment clients was to ‘keep calm and carry on’ and I am delighted that in every single case where I have had one of those conversations with clients, they have heeded our advice and remained invested.

Sadly, my bubble was burst yesterday as the US market took a circa 6% hit due to concerns about a second spike in cases and a less-than-positive update from the Federal Reserve. This morning, we have had some sobering news a little closer to home, with the ONS reporting that the UK economy shrank a record 20.4%.

However, I still have reasons to be cheerful. First of all, despite yesterday’s events, most global markets are still substantially better off than they were just 3 short months ago. If you had told me on 20th March (around when most markets hit their low point) that we would be in a position where the FTSE 100 and the S&P had recovered 22% and our own Balanced Portfolios would be up around 13-14%, I would have taken that!

Second, the fall in GDP was “only” 20.4% (Please note – despite my well-known love of inverted commas, I don’t think I have ever used them so seriously – I know that 20% is a huge number). While this is a big blow, it could have been much worse given the extent to which the economy has been shut down over the month of April. The fact that we managed to maintain 80% of economic activity is a big achievement, I think. The fact that the FTSE 100 rose this morning on the back of the news suggests that the market was expecting worse.

Finally, the recovery has been one driven very much by certain sectors – technology and pharmaceuticals in particular. This means that there are other sectors (airlines, travel, hospitality, car sales etc) where there is still room for a significant recovery to take place, potentially taking markets higher as economies are re-opened.

Please don’t get me wrong – I know there is a still a long way to go before anything gets back to anywhere approaching normal, however I still believe that this crisis is nowhere near as bad as other events that the human race has lived through and ultimately prospered after.

We have better science, better technology and more information and knowledge today than at any point in human history and surely all of this combined progress will get us through this crisis (second spike or not).

When markets are in free-fall, our emotions can sometimes get the better of us and lead us to take irrational investment decisions. However, there is also a second point where our emotions can lead us astray – that time is now – that time is when previous losses have been recovered. I would strongly encourage you to read this article by 7IM to learn more:

 

This post shall not constitute or be deemed to constitute an invitation or inducement to any person to engage in investment activity and is not a recommendation to buy or sell any funds of individual stocks that are mentioned in this post. Past performance is not a guide to future returns and the value of capital invested and any income generated from it may fluctuate in value.

Matthew Smith’s Thoughts on The Pandemic – 20th March 2020

As we begin to come to terms with our new way of life, many clients have been asking me for my personal views and opinions on the current situation and where I think things will go from here. As such, this is a collection of personal thoughts on all sorts of issues which I hope you will find comforting and reassuring at what is clearly a difficult time for everyone.

The Current Situation

As I write, the markets are in turmoil, most people are working from home and we are panic buying and stockpiling loo rolls. I do appreciate the severity of the situation, however some of these moves (I saw a chap at Tesco a few days ago purchasing at least 200 loo rolls) are being overdone and overblown, in some cases to epic proportions. I have the same feelings about the market reaction which I will come onto in a moment.

I believe we are fast approaching the point of ‘peak panic’ (although we are not quite there yet). In the coming day or two the schools will close and I strongly suspect that we will enter a period of enforced lockdown, much like we have across Europe. Once these measures have been announced I suspect the panic and irrationality will have one last hurrah and then, slowly, gradually, we can begin to rationalise and come to terms with our ‘new normal’.

It is said that stock markets climb the stairs and take the lift down and I feel the same will be true of our feelings and reactions to this current crisis. At the moment, things feel very new and the change is unnerving. But, over time, we will get used to the new way of working for a time and gradually things will return to normal (it is just that we don’t know exactly when that will be).

The gradual return to normality will receive little media attention and we won’t feel it nearly as strongly as the painful changes we are making to everyday life now, but, slowly and surely, it will happen.

Human emotion is strong. We are not always rational creatures, especially when faced with a threat to our health and the desire to feel like we are ‘doing something’ is great. We have to remember that the people who trade billions of dollars on the global markets are human beings too and will suffer from all of the same fears as the rest of us and this will no doubt impact on their decision making (whether they realise it or not).

The Virus

As as starter for 10, I am not an epidemiologist and I do not have any scientific qualifications of any kind, so my views on the issue of the virus are very much from a layman’s perspective.

The health issues caused by the virus are heart breaking and there have been some harrowing scenes playing out on the evening news. We have to remember that these are a minority of cases, however that does not make it any easier to watch. My thoughts are with anyone personally impacted by this situation.

In order to see ‘light at the end of the tunnel’, in my view, one of two things will need to happen:

A – We develop and deploy a vaccine.

B – We develop so called ‘herd immunity’.

In reality, I suspect that it will be a combination of both of these factors that sees the end to this crisis and both will probably happen sooner than we expect (disasters always feel like they will take a lifetime looking forward, but usually seem to pass more quickly in retrospect). There is news today in the papers that the progress of the vaccine is gathering pace and that it could be ready in months and not years. Early days yet, but a green shoot of hope and I certainly have my fingers crossed.

As an eternal optimist and as an entrepreneur, I have every faith that we will get through this crisis and return our lives to ‘normal’ before long. I suspect that ‘normal’ might look a little different at the end of all this, but not that different.

The Market

By now we are all aware that the markets have had a rough few weeks. To think that we were sitting at record highs barely 3 weeks ago is almost unbelievable. The speed with which markets have fallen is unprecedented and, I believe, is more to do with human emotion around the health crisis than anything fundamental.

There will no doubt be an economic impact of this crisis and there will be a hangover, just like in the financial crisis of 2008. This will be one of those watershed events that will be remembered and spoken about for years to come.

Despite the panic, I do personally believe that the sell off has been overdone (based on the facts and data we have available now). A great example of market irrationality is the Amazon share price. Arguably one of the companies who are best placed to do well in this brave new world, Amazon are in the process of hiring 100,000 new workers globally to meet never-before-seen demand. Why then is their share price down circa 12% over the past few days? Because of panic and irrationality is my theory – certainly not because of company fundamentals. I could give many more examples of companies whose share price should be rising, but is not – a tell tale sign that markets have gotten carried away with themselves.

My own view is that we are approaching the bottom (although perhaps we are not quite there yet), although I would not like to predict when this period will end.

What I do have confidence in however is that markets will recover. Markets have always recovered. They have recovered from a great depression, two world wars, numerous more localised conflicts, black Monday (the 1987 one), the dot-com bust, 9/11 and the financial crisis. Why should this be any different?

The other reason that I have confidence that markets will recover is because of cash. One of the main reasons for the markets rapid rise over the past decade or so has been the paltry rates on cash savings since the financial crisis – say about 1% on average. In this environment, for anyone who wanted a sensible return, money has had no place to go but into the equity markets.

This factor, I believe, will be even stronger in this recovery. As of a few moments ago, the Bank of England has just cut rates to 0.1% – the lowest level ever. Given the current situation, I imagine they will be close to that level for a decade or so to come. At the same time the FTSE All Share currently offers a forward looking yield of over 6% (there will be some dividend cuts no doubt, but still). Economically this difference can’t be sustained and when we all emerge from our homes at the end of this, we will want our money to work hard for us – the only place it can go will be equities.

Finally, I am buoyed by the spirit of the entrepreneurial community. I belong to several business coaching groups and the ingenuity being displayed by businesses in finding new ways of working is very impressive. I stayed at a small hotel at a pub on Tuesday and the owner was just preparing to launch a food delivery service in the village to keep his kitchen running if the pub has to close – this type of creative thinking will be happening up and down the country.

In our own business, the reaction to the use of video calls has been incredible, with some clients commenting that they actually prefer this as a communication medium given the significant cost and time savings it affords. While we will always offer face-to-face meetings (nothing will replace that), I suspect we will all continue to use video conferencing more once this crisis is over.

We have also seen a rise in new client enquiries over the past few days as people use periods of self-isolation as an opportunity to get their affairs in order and attend to financial planning tasks that may well have been put off for many years.

Other businesses are also taking similar measures to make themselves more efficient and accessible. For example our legal partners have just introduced a completely paperless instruction taking and drafting service, meaning that we can create new wills, trusts and estate planning solutions for those who need them completely over video or phone call during this time.

Is This ‘Different’?

This is perhaps the most common question people have asked me over the past few weeks. Is this situation different? Do the normal rules apply?

The answer is yes … and no.

Yes – this is different. But only in the sense that every market downturn is different to the ones before it. The 2008 financial crisis was very different from 9/11, which in turn was very different from the dot-com bust and so on.

No – this is not different in the sense that I am sure we will recover from this. It might take 6 months, it might take a few years, but if the markets can recover from everything the world has thrown at them over the past 130 odd years (including many serious pandemics) then they can certainly recover from this.

If you would like some reading to help reassure you (and keep you entertained during lockdown) I would strongly suggest Factfulness and The Righteous Mind. I guarantee you will see the world differently after reading these books.

How We Can Help

Although clients thank us most when portfolios are rising, it is at times like this where we add most value and really earn our keep. The team and I are working harder than ever before and will continue to do so to support our clients through this time. I am proud and humbled by the effort and in some cases sacrifices that the team have made in providing an outstanding service to our clients.

We are in constant contact with our investment partners at Square Mile and other financial analysts and are monitoring and managing portfolios to limit the damage and make the most of the opportunities that exist in this market (and there are always opportunities somewhere).

Our new Zoom video conferencing system is now fully operational and there is something more comforting about seeing someone’s face versus just speaking on the phone. If you would like to schedule a video call to discuss your own situation or just wish to have a friendly conversation while self-isolating, just ask Kayleigh who would be more than happy to make the arrangements.

Comfort Reading For Uncomfortable Times

Next week, we will be sending out a whole host of curated articles and content to help you see through the market and media noise and make calm and sensible decisions in what is clearly an unusual and unsettling time.

We hope that this content provides some comfort (and entertainment) in the weeks and months ahead.

If there is anything more I can do to help you – please just ask.

Yours Sincerely
Matt

Market Update – 26th 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!