Investment update

2019 was a great year for investments, but this seems to be a long time ago now we’ve had the Coronavirus Crash.

Looking back for a moment, the UK struggled for much of 2019 with Brexit uncertainty. As we approached the year-end, markets enjoyed a double “Boris Bounce”; firstly, there was relief that an initial trade (or divorce) deal was signed with the EU, secondly, the markets enjoyed a strong rise when the Tories won another term in office with a large majority.

2020 started well, but we’ve now been hit by the Coronavirus pandemic. This initially affected Asian markets when China went into “lock down”. The long-term impact for Asia and the rest of the world is uncertain. Other viruses (Spanish flu excepted) caused deaths measured in thousands, not millions, but the complexity of the modern world with regards to business and trade is such that quarantine measures are very disruptive.

The markets finally woke up to the potential of this disruption when the virus spread to Italy in a meaningful way around a month ago and global markets crashed, now falling around 30%. Northern Italy appears to have been especially vulnerable to the virus due to an aged population, an unusually large number of smokers and a patchy health care system.

A combination of population lockdown and an immediate loss of customers in some business sectors (eg travel and tourism) means that without Government support many businesses will not survive. This support appears to be forthcoming with Governments around the world offering a combination of financial packages for companies large and small, benefits for individual employees to keep them in work and more general monetary stimulus measures. We may end up in a situation where there’s a drop of “helicopter money” which was tried recently by the Hong Kong government to try to get consumers spending in the shops again.

In my opinion, most reasonably sized businesses won’t go bust. Either companies have enough cash to ride out the storm (especially if 80% of their staff costs are covered) or governments will bail them out. This is OK for the long-term but in the short term, the tremendous uncertainty regarding prospects for almost every business means that they are impossible to value. Combine this with a “flight to safety” and you can see why investment values have crashed.

In these circumstances, the lower-risk investments that populate most portfolios have performed well. Safe-haven investments, like government bonds, rise in value when equity markets endure a large sell-off. This helps reduce the volatility of most portfolios. However, even the “safe haven” investments fell last week. The reason was due to some over-leveraged investors being forced to liquidate all assets in order to cover trading losses elsewhere. At least the losses on most bond funds are modest compared with equity markets.

The UK commercial property market is also in difficulty. Many tenants are unable to pay their rent, but landlords have no other prospective tenants at the moment. Valuers find it impossible to determine property values, so all property funds have suspended trading, as to either buy or sell units in a property fund at present might disadvantage the buyer or the seller or both.

Private Investors have three elements of protection;

1. Your asset allocation; most investors have a balanced portfolio with many components. The cautious elements have now fallen a little in value cushioning larger falls in the equity markets.

2. Time; All our clients invest for the long-term. Markets will recover (as will the underlying economies of the world) given time.

3. Scale; Most customers invest in larger companies which are more resilient when there’s an economic downturn.

My experience has been that no matter how calamitous a crisis is, markets recover given time. I’m confident that the current pandemic will not prove to be the exception.

 

Jim

Jim Aitkenhead BA(Hons)Econ FCII APFS ACSI

Chartered Financial Planner