Time to take the temperature of your investment portfolios

“Common sense is genius dressed in its working clothes.” Ralph Waldo Emmerson, American philosopher

Despite the imminence of Brexit and the political drama of the recent US Presidential election, the coronavirus pandemic continues to dominate headlines, in both the media and within financial markets.

The post US Presidential election world is growing a little clearer, even if it is still not, alas, the post-covid world. Last Thursday offered the inspiring online spectacle of three powerful central bankers – Andrew Bailey of the Bank of England, Christine Lagarde of the European Central Bank (ECB) and Jerome Powell of the Federal Reserve -undergoing a grilling from Roula Khalaf, the editor of the Financial Times.

Only days after the exciting news of the Pfizer/BioNTech vaccine results, they made it plain that the virus was still their greatest concern. “We do see the economy continuing on a solid path of recovery but the main risk we see to that, is clearly the further spread of the disease”, said Powell. “With the virus now spreading, the next few months could be challenging.”

October saw the re‐imposition of lockdowns across France, Germany and England. Having fought against a second lockdown, declining to opt for a “circuit breaker” lockdown in the October half term, as a result of SAGE virus modelling (which predicted a winter for the NHS far worse than the potential worst‐case scenario), Boris Johnson succumbed to the inevitable. The UK is now in lockdown again until early December, putting to the sword whatever chance remained of a V-shaped economic recovery. Schools and universities will remain open, a trade‐off to allow parents to continue working but one which will surely make the virus more difficult to overcome in the short and medium term.

Short-term economic activity will be negatively impacted by further curtailments and restrictions, but there are several very important differences between now and the first lockdown in March.

Firstly, investors have received a clear message that both central banks and governments will continue to provide unprecedented support to the real economy. This was not clear at the outset of the pandemic but as it became apparent, especially after the US Federal Reserve pumped liquidity into the system, stock markets stabilised and began to recover.

The UK furlough scheme has been extended (on the very day it was due to expire). The Bank of England is to pump another £150 billion into the economy and the ECB has strongly hinted at further stimulus in December, while further US stimulus will be enacted post the election.

Secondly, there has been an improvement in medical provision since the first wave in terms of capacity, treatments and work towards the development and production of vaccines, with Pfizer BioNtech leading the way.

Thirdly, hopes for overcoming the virus continue to derive from the Asian Pacific region where, for example, Australia finally emerged from restrictions, having suppressed the virus back to single digit daily cases from a height of 700 cases every day. It was an impressive feat but also demonstrates how tough the UK, Europe and the US will find it to come out from lockdown conditions, as it took the state of Victoria over 4 months to finally ease restrictions.

Chinese economic data in October showed signs of continuing recovery in all areas except for tourism. The IMF’s recent GDP forecast update predicted China to be the only major economy to record GDP growth in 2020, confirming the expectation that economies which are able to best manage Covid‐19 will have a demonstrable advantage coming out the other side.

Fourthly, public companies have raised record amounts of capital (both debt and equity) over the last six months, so most companies are now better placed to get through the crises and be in a position to take advantage of the opportunities once we reach the other side.

So, investors now have a precedent which they did not have in March. As a result, more liquidity, more stimulus and therefore more government debt lie ahead, all of which will outlast the pandemic. The measures are intended to alleviate and allow recovery from the short-term disruption that will occur but they cannot prevent economic slowdown.

There is plenty to worry about in the short term, be it the second wave of the virus in the northern hemisphere, a potentially destabilising reaction to the US election and of course a no-deal Brexit. However, stock markets and companies have been dealing with these issues for a while now and they are not considered the ‘black swans’ they were when they first appeared. Just as importantly, the authorities are on the case and it is likely that we will see some further positive medical developments by early next year.

Despite the ongoing uncertainty, stock markets seems to be positively benign at present and have been buoyed by the promising statements from Pfizer and Moderna regarding the possibility of rolling out a vaccine early next year. While certain sections of the economy have gone to hell in a handcart, the enthusiasm for technology and growth stocks has not abated. Optimism about a more general recovery in the economy seems to remain prevalent.

In this environment investors would be well advised to revisit their portfolios to get a clear understanding of the effects of market volatility during the first half of 2020. Some of those effects will have been transitory, as many markets have bizarrely returned to pre-pandemic levels for now, but others will have been more permanent, as industries and sectors realign to the new normal.

For instance, do you understand the valuation changes in your holdings? What do they say about the way you are positioned for possible medium and long term economic developments?

Most importantly of all, how did you feel about your investments at the bottom of the market in March and April? Now is the time to ensure that your positioning is calibrated to your psychological and financial risk tolerance, when you can be objective and unemotional. Doing so while in the midst of market turbulence is the primary reason for underperformance of many private investor portfolios and is to be avoided.

It is probably also a good time to consider overall market trends with a view to adjusting portfolios for the future. Is it the new paradigm that economic recovery from the damage caused by the response to Covid-19 can only be achieved by a fundamental shift towards a zero-emissions future? This is stated by some commentators as a matter of fact – that reducing greenhouse gas emissions to ‘net zero’ by 2035 will be the powerhouse of economic growth.

But this, of course, is just a contention; much like the complementary one that investing in companies which are wonderfully compliant in meeting their economic, social and governance (ESG) commitments will bring excess investment returns.

When it comes to investment, markets can be irrational for a very long time. That may be the situation we are currently seeing, with stock markets kept buoyant by a flood of cheap money and there being no alternative to achieving a reasonable return on cash savings. With traditional industries and businesses in decline, most of the money is going into technology, growth stocks or internet shopping driven businesses. This trend may not continue forever but in the meantime, following market trends is possibly the best approach whilst maintaining a sensible balance and diversification between sectors and geographies.

In the midst of a damaging second wave and the resulting lockdown restrictions, life and investing remain surreal. Choices are becoming steadily harder as the struggle between personal safety, mental wellbeing and economic survival grow more complex and more nuanced. Uncertainty is rife and in these troubling times, having a structured approach to the financial side of life has never been more important. A robust lifelong financial plan and lifetime income strategy will become even more valuable as time passes.

As always, we wish all our clients, families, and friends a safe passage through the difficult months that lie ahead, and we look forward to sharing a brighter future.

Thank you for your continued support and we hope you enjoy reading our regular updates. The next edition of The Clarion e-newsletter will be published early December.

Keith W Thompson
Clarion Group Chairman
November 2020

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