We ran our first Client Webinar recently where we received a number of financial questions. Several questions addressed very similar issues which may be felt by a number of you, so we wanted to publish them here so they could be of use to a wider audience.
How are you communicating with fund managers about rebalancing their portfolios?
We are in constant communication with all the fund managers of funds in our panel, and funds we could be considering adding to it. In the last few months we have averaged 60 webinars and Zoom meetings a month and obtain a high level of transparency to adjustments they are making to their strategy and holdings within their portfolios. This helps inform adjustments we make to our asset allocations, both in terms of funds and between equity sectors, bonds, and other asset classes.
Market responses seem to be over optimistic compared to the current state of the economy?
Market cycles and economic cycles are not always co-ordinated and after every major correction this question always arises. The short answer is that markets are looking to the future and how quickly the economy will recover rather than the current economic situation.
The quick rebound is clearly not reflecting the current economic reality and we expect difficult macro data to be released over the next few months. However substantial sustained monetary and fiscal support from governments and central banks is creating optimism in markets that the recovery will be much quicker than with previous recessions.
Further factors can also be having an impact on the indices. The indices include large numbers of companies in different industries and, for example, the S&P 500 of US stocks is virtually back to where it was a year ago. This is the result of large weightings for companies such as Amazon and Apple who are building their business through the Lockdown and are not representative of the wider economy.
Do we anticipate additional falls in market values?
We are certainly aware of the risk that this could occur as companies declare results over the next few months but we are all estimating how quickly the financial stimuli will get the global economy growing again. After a major fall in market values it is quite normal to experience periods of extreme volatility as the market finds a new floor.
There is still quite a lot of volatility and it would be unwise to dismiss the possibility of further falls, which is why we have reduced the equity exposure in portfolios in favour of government bonds and cash. However, with the levels of liquidity being committed by the authorities further major falls are a low probability.
Will failure to secure a good Brexit deal have a negative market impact?
Failures to secure a good Brexit deal will have a negative impact on UK companies, but primarily small and medium sized companies. However a large proportion of profits for our top 100 companies come from overseas and may actually benefit due to the currency effect. If we have a bad deal, or no deal at all, Sterling is likely to fall compared to the Dollar or the Euro.
This, combined with the proportion of overseas income for our largest companies, means it could benefit these companies profits in Sterling terms. The issue would be to ensure the UK equity content is focused on larger companies rather than smaller companies whilst our exposure to UK Gilts and non UK equity provides further defence.
Should we consider cashing in some investments with the index at 6000?
It is impossible to guarantee that markets will not fall below this level but this would mean registering a real loss and history has taught us that staying invested tends to be the best policy if you do not need access to the money. The probability is that the markets will recover, although it is impossible to guarantee when. If you were to sell the investments because you wanted security of capital you do not have any realistic option but to hold the capital in a cash account and you can never be certain at what level you would feel comfortable re-entering the market. Retaining a well diversified portfolio is probably the best option at these levels.
What measures do you think the Government will take to pay back its borrowing?
This will not be a priority at this time and they are likely to borrow more for longer. With interest rates at 0.2% on 10 year Gilts it is not very expensive to borrow the money and governments have relearned the lessons of Keynesian economics and Roosevelt’s New Deal of the 1930’s. In short if the government is borrowing money from the Bank of England, who print the money for them to borrow it is not a problem. This money is then pumped into the economy to stimulate economic growth to get us out of the recession. This increase in money supply is not likely to create inflation at the moment because the velocity that money is moving around the economy is low. Eventually, as the economy recovers, inflation could become a problem and interest rates are likely to rise from the historically low rates we are currently experiencing. However this inflation will help reduce the real cost to the government of repaying the borrowings.