Ray McHugh, IFA in Barnet, North London – what to do in market falls?

Thursday 9 April, 2020

Ray McHugh, independent financial adviser in Barnet, North London provides a Quarter 1 2020 update and recommends what to do during market volatility.

Investment Report Q1 2020

The start of the year looked to me, to be a year of expected calm for global and financial markets. How different that has turned out to be!

In December we saw a General Election that offered some political certainty, with a Government elected with a large majority of 80 and the disengagement/divorce settlement agreed with the EU. Albeit this did leave the issue of trade negotiations still to be resolved by the end of the year.

The General Election saw a relief or rally of equity markets with the FTSE 100 finishing the year up 12% since the start of 2019. Property markets also finished the year on a more positive note. Global growth in December and early January appeared solid with the general financial system being okay despite record levels of debt being held.

Three months into the year and the outlook is very different as the Coronavirus grips the global economy, with more than 170 countries having to contend with the virus according to the BBC. 

The key question which my review will try to answer is ‘What should investors do in response to market falls’? 

I appreciate that it is easy to say that people should not do anything in response to recent events, however, it is sensible to avoid a knee jerk reaction.

My own personal experience is that markets are often driven by sentiment and I agree with the comment made by the Economist that sentiment often means that stock markets perform irrationally at times. The FT in one of its leader columns talked about the nervousness and disorientation not just of the “lock down” but the “real world” aspect of having a rapidly spreading potentially fatal disease spreading across the population.

I do not yet feel personally vulnerable, however, like many people I care about others who are feeling this way. The sense of having travel restrictions and social interaction reduced is unpleasant. My own family is pretty far flung in Ireland, US and Canada, and whilst I am not necessarily jumping off and on planes to visit, it is nice to know that I have the choice to do so. I also have a mother-in-law aged 100 and if something were to happen to her our chances of getting to see her are very remote as things stand.

The Coronavirus has, of course, seen huge unprecedented intervention by Governments and Central Banks to support economies. In France, President Macron promised unlimited financial support for those businesses or employees affected, announcing guarantees for bank loans to companies. He said, “no business whatever its size will risk or face risk of bankruptcy.” This was really quite a promise and he was not the only world leader making it.

As you will see later in the review stock markets have fallen sharply across the world in a very short period of time. The speed in which this happened did not give Investment Managers time to change their approach. In my view, de-risking after falls of this magnitude and going into cash simply locks in and consolidates losses which at this point are only paper losses. The other issue is of course when to re-invest and go back into the market?

At Lonsdale Wealth Management, as you know, we encourage and recommend that clients have a separate cash position to call upon in times and situations such as this. This is why, in my view, it is logical to remain invested for most people. If an individual is investing for the long term, they should not overreact to short term movements in the market. My experience is that whilst it is right to feel concerned, it is also worth remembering that although stock market corrections or crashes can be scary it is wise not to allow fear to dictate your investment strategy.

By nature, I am an optimist – making an assumption that the coronavirus might have a short or relatively short term impact on economies, companies and markets, with a return to a form of normality in the second half of the year, there is some hope that the UK economy can recover. Clearly the Government hope that this is the case as the support package offered by our new Chancellor is aimed at supporting business, companies, employees and the self-employed over the next 3-6 months.

The UK’s economic performance for the remainder of the year is likely to be poor from a GDP point of view. The £330 billion support package is designed with short term in mind and inevitably it will need to be paid for by higher taxes and more borrowing by the Government.

When will we see the bottom of the market?

The question most asked of me is ‘when will we see the bottom of the market’. I am not sure that the recovery for both stock markets and economies will be a V-shaped theory as put forward by MoneyWeek, who argued that Chinese funds had performed well in March. I believe that until the virus is seen to be under control, we will not know the answer to this – perhaps in May? An analyst at BlackRock told me that “nobody in the markets is a virus specialist so expect stock markets to be on edge until the numbers plateau”. I do feel, like them, that this market correction is temporary and not a permanent destruction of capital.

Both the IMF and reports at the end of the quarter in the FT acknowledge that the lock downs imposed by Governments on both sides of the Atlantic have pushed the global economy into its sharpest downturn since the Great Depression of the 1930’s.

Certainly, the UK’s service sector has slumped with so many jobs in this area lost and some of these may not return at the end of the pandemic. The Government hopes that measures like the “furlough scheme” will allow businesses such as cafes, bars and restaurants to re-engage with staff in the future.

The attachment at the end of our review shows how all the major indices/stock markets have performed in Quarter 1 2020. All of them show negative returns as a result of the pandemic and the market sell off of their positions.

Concluding thoughts

1. If you are investing for the long term do not panic about short term movements in the markets
2. Focus on what you think markets will be doing or where they might be in 5 to 10 years’ time, not on what has happened in the last 4 weeks or what will happen in the next 4 weeks
3. It is notoriously difficult and tricky to accurately time the markets. Even professional fund managers struggle to do this. It is time in the market that counts.
4. Using cash reserves as a short-term measure instead of taking income from investments can be a sensible idea.
5. There will be some volatility over the next few months in the markets “until the helicopter engines start up” and you see a recovery in equity markets.
6. Accept that there is an element of irrationality in how markets behave because they have been driven by sentiment (fear in my view).
7. Remember there will be some businesses doing extremely well in this difficult period. Companies such as Diageo, Unilever and Tesco will be in this category and you can probably think of others.
8. Stock markets will recover in time, and having a solid mixed portfolio with a mixture of equities allocated correctly will work for you in the longer term.

At this point in time I do understand and appreciate that people are concerned about their health and the well-being of families. These will rightly be a priority. However, if you wish to talk about any aspect of this report or your Lonsdale Wealth Management portfolio please contact your Lonsdale financial adviser.

 

Quarter 1 2020	Major Equity Indices
FTSE ALL Share	-25.95%
FTSE 100 (UK)	-24.80%
S+P 500 (United States)	-20.00%
Euro Stoxx 50 (Europe)	-25.59%
Topix (Japan)	-18.49%
MSCI World Index (Global)	-21.44%
MSCI Emerging Markets	-23.87%
Hang Seng China Enterprises	-14.09%

 

Source – Aberdeen Standard

 

 

 

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