The Small Print

The contents of these muses are my own opinions, should not be taken as a personal recommendation to invest in the areas mentioned and does not replace the need for individual independent advice.

Inflation or Deflation

Inflation or Deflation?

I read an interesting article in Money Mail a few days ago with the headline – “Will monetary ‘shock and awe’ send inflation soaring or are we set for deflation?” It is well worth reading. You can find it here:

Data shows inflation in the UK at least is tumbling. This is hardly a surprise with a severe global economic slowdown due to the Covid-19 pandemic along with a sharp fall in the price of oil. The cliff edge collapse in GDP, a key measure of economic activity and rise in unemployment is worse than during the Great Depression of the 1930s. Moreover with unprecedented monetary and fiscal support including the mass furloughing of workers the real economy so far, in the UK at least, has been largely shielded from the full force of the storm. Eventually the flow from the magic money tree will stop, (the UK furlough scheme is scheduled to finish at the end of October) and then the real pain will be felt. This will slow the economy and price inflation although it should be noted there is currently evidence of food prices increasing.

What we are witnessing is disinflation, which is a fall in the rate of inflation. So if inflation falls from 1% p.a. to 0.3% p.a. prices are still rising but not as fast as they were previously. Disinflation is not the same as deflation which is an outright fall in prices. Deflation is very rare. According to the Money Mail article the last time we had deflation in the UK  was in April 2015 when prices fell by 0.1%. Prior to that you have to go back to the 1960s. The deflationary episode just over five years ago wasn’t anything to write home about but prolonged deflation is serious as the history of the Japanese economy shows after the bursting of the property and stock market bubble in 1990. With prices falling there is no incentive to spend if the consumer knows that the new car or TV they want will be cheaper tomorrow. Moreover in a deflationary environment the purchasing power of cash increases in real terms even if interest rates are zero whilst debt increases its real value relative to income and asset prices. It is a damaging negative spiral which is why the Japanese government and central bank have been so keen to generate inflation in the economy.

The fear of spiralling inflation is based on the unprecedented government and central bank support which has been faster and more extensive than during the global financial crisis of 2007 to 2009. Russ Mould, Investment Director at AJ Bell observed the current stimulus from the Fed dwarfs what it did 12 years ago. He wrote: “This time it has poured in $3 trillion in barely three months, whereas it added $3.2 trillion in QE stimulus in 12 years from 2008 to 2020.” To date the total stimulus around the world has been $20 trillion so far. The Bank of England announced a further £100 billion a few days ago. Back in 2008 it was mainly monetary policy to support the economy – ultra low interest rates and money printing. Fiscal stimulus – government spending and tax cuts was largely absent. However this time around government support has been massive. Alasdair McKinnon manager of the Scottish Investment Trust likens it to helicopter money, the government paying money direct into people’s bank accounts. This adds up to a much greater potential for inflation than after the banking crisis. However extended lock downs and social distancing will help kerb price inflation. Even if restrictions are eased a cautious public will be reluctant to go back to crowded pubs, restaurants, sports venues and shops and many will tighten the purse strings for fear of losing their jobs. Imported inflation is another story. That will depend on the strength of the pound and the extent of the UK’s reliance on imports. What we may see however is asset inflation as a consequence of QE and other monetary stimulus as we did after the financial crisis.

We simply don’t know whether we are heading for inflation or deflation but artificial factors are in play when it comes to the headline figures. For example the recent collapse in the price of oil will eventually fall out of the year on year inflation indices and wage inflation will spike as the unemployment rate falls. The government is so worried by this technical wage inflation increase that they are considering scrapping the triple lock on state pension increases*. My feeling is that we will see low inflation for the rest of the year but not outright deflation, unless there is a another economic shock. Longer term the global economic recovery could be slow and anaemic i.e. something similar to the post global financial crisis period. The global economy is still hooked on easy money. Remember the panic markets got into with the threat of withdrawal of QE – the so called “taper tantrum” of 2013 and quantitative tightening at the end of 2018. I am more inclined to think deflation is more likely than rampant inflation. Disinflation is OK provided it doesn’t tip into deflation. The Goldilocks scenario is modest inflation of say 2% p.a. The consequences of spiralling inflation or deflation on asset prices and investments is a subject in its own right. Something for another time. The Money Mail article reviews the case for gold but space does not permit me to comment on this here.

*The triple lock is a pledge to increase state pension each year by the higher of wage inflation, price inflation or 2.5%. If wage inflation artificially soars by 18% in 2021 due to a recovery in the economy state pensions increases of 18% would massively dent public finances. You can read more here:

The content of this blog are my own views based on the news articles quoted.  It is intended as general investment information only.  Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.

Wall Street v Main Street

You have probably noticed that equities continued a strong rally in May. Wall Street has done well. On the 23rd March at its nadir the Dow Jones Industrial Average closed at 18,592. On Friday it stood at 27,111 a rise of 45.8%. Similarly the FTSE 100 index rallied from 4,994 to 6,484 over the same period, a gain of 29.8%. A word of caution though. The Dow Jones Industrial Average and the FTSE 100 are not the most representative stock market indices of their respective domestic economies, the S&P 500 and FTSE All Share are. These rose by 42.7% and 31.9% respectively, broadly similar to the gains of their narrower more internationally focussed sister indices.

Whatever you make of the figures it is clear markets seem to be pricing in a V shaped recovery to the economy and this is a puzzle given what is happening in the real word. Declines in global trade, a sharp rise in unemployment and existential threats to many businesses will damage the real economy in the short term at least if not permanently. And also why if dividends have been suspended and company earnings are being slashed are share prices rising? Is Wall Street (representing the markets) detached from Main Street (representing the real economy)? In a recent blog post Russ Mould, AJ Bell’s investment director addressed these questions. He makes the point that stock markets are forward looking and consequently they anticipate a future recovery in the economy and company profits. If however the cash generated in the future disappoints then share prices could unravel. Here Mould sounds a warning. He noted that corporate profits in the US as a percentage of GDP in the first quarter of 2020 fell to their lowest level since the first quarter of 2009 and that in nominal or cash terms corporate income from S&P 500 companies in Q4 2019 was no more than Q2 2014. A real increase in company profits is needed and pronto to justify current prices.

The rally in the equities since the end of March can also be explained by rapid and unprecedented fiscal and monetary stimulus from governments and central banks. Measures such as furloughing grants, business loans, tax deferrals and cutting interest rates are currently shielding businesses and the real economy but what happens when support is withdrawn? It can’t go on for ever.

You will not be surprised to learn that stock markets especially in USA are being supported by technology stocks such as Microsoft,  Facebook, Amazon, Apple and Alphabet (the parent company of  Google). Their earnings and balance sheets are seemingly invulnerable. Other defensive businesses such as food retailers and healthcare are also holding up well. The reality is sections of the economy are still doing fine and are supportive of share prices. In contrast mass failures in the tourism, hospitality, travel and retail industries are inevitable. Here in Eastbourne two large sea front hotels failed after the collapse of Shearings, a holiday coach company. Excluding major PLCs such as airlines and hotel groups many independent businesses such as small hotels, pubs, restaurants and shops are unlisted. They are either run by the self-employed or are private limited companies whose shares are not traded on a stock exchange. Mass failures here therefore will not directly affect stock market indices although they will impact the real economy. This illustrates an important principle that the economy and the stock markets although linked are not the same.

Despite the fact there are winners in the current crisis notably online businesses and that the rally in markets is partly justified it may well be a case of hope over reality. Unless Main Street delivers real economic recovery and earnings growth Wall Street may be in for a shock. Until then investors should treat the rally with some caution. Investors shouldn’t be fooled that the fair wind behind equities means the worst is over.

The content of this blog is intended as general investment information only.  Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.

Beware the fraudsters

Any IFA must be able to tell his or her clients what they could or should invest in, what is good and suitable. An incident yesterday brought home to me the reverse principle i.e. that equally advisers must tell clients what they definitely should not invest in. Yesterday I had a call out of the blue from a prospective client who wanted a second opinion on a fixed rate bond she had come across. She was considering transferring an ISA cash pot in excess of £50,000 into the product for a higher interest rate. The one year bond offered a 2.5% p.a. interest rate and the three year version 4% p.a. compounded.

My contact categorically wanted to take no risk with her money. She was savvy and had done her homework, having questioned the product provider and talked to her accountant but there were one or two things she was not sure about. We talked around some of these issues and agreed she would e-mail me the plan document to review. It was a professionally produced 21 page PDF with the exact logo of a major investment company. It detailed the product including the risk warnings, a Q&A section, small print and a client agreement. It listed all the details for making complaints including the Financial Ombudsman Service. To the untrained eye it was very plausible and a legitimate investment but the content and style of writing raised a lot of red flags for me. I concluded it was a scam and informed my prospective client. Later in the day she e-mailed me with an FCA warning that had just been published the day before of a clone company imitating the investment house. Interestingly when I had searched for such warnings only an historic one from 2011 came up.

There are several lessons to learn here. Fraudsters are getting cleverer and their scams are more sophisticated. This was much more compelling than the so called “boiler room” scams – the high pressured sales calls about investing in shares whose price is about to rocket. The prospectus was carefully crafted and the interest rates offered were not ludicrously high, which raises immediate suspicion. Just how can you get a 6% or 7% p.a. guaranteed return with interest rates so low? However the prospectus had holes in it from a regulatory and technical perspective. Sometimes I bemoan how complex financial products, taxation and regulation is but this incident has made me realise that complexity has its value. It is very difficult to create a perfect scam investment and fool an investment professional or IFA. I have decided that I am not going to publish the tell-tale flaws to avoid educating any potential scammers reading this blog on how to avoid them.

With interest rates on cash being so low scams of this sort will attract plenty of investors who act without advice. As per the recent Government advice, we need to be alert.  

Benign April carries hidden dangers

Crazy March, described in my last blog post gave way to a benign April, so far. Like the weather global stock markets have been warm and sunny. According to AJ Bell Investcentre data from Refinitiv shows equities have sharply rallied from their lows on the 23rd March. The S&P 500 a more representative index of US stocks than the Dow Jones Industrial Average rose 28.5% whilst the FTSE All World, a broad based global equity index gained 24.7%. The FTSE 100 index put on 16.4%. With seemingly unlimited fiscal and monetary stimulus, falling coronavirus infection rates and talk of easing of lock down restrictions in various countries investors could be fooled in thinking the worst is over. However the history of stock markets crashes shows us that during bear markets there are frequent intermediate rallies which eventually subside before the final bottom is reached. The market effectively capitulates to the reality that things are bad, really bad. The rallies prove to be dead cat bounces. This can be seen during the global financial crisis from 1/1/08 to 6/3/09. Data from Financial Express (again cited by AJ Bell Investcentre) show alternating corrections and rallies lasting up to a month or two. For example from 3/9/08 to 10/10/08, which included the collapse of Lehman Brothers the MSCI World Index fell 27.9%. From 10/10/08 to 4/11/08 it rallied 17.3%. A further fall of 16.5% followed over the next 16 days. Overall the market was down 36.5% over the whole period of 1/1/08 to 6/3/09 despite four rallies. Interestingly every subsequent correction drove the market to a new low.

The reality is this has all the appearance of being the worst economic crisis for nearly 100 years and it may prove to be more potent than the Great Depression of the 1930s. The Federal Reserve Bank of St Louis suggested that more than 47 million Americans may end up being out of work in the US i.e. 32.1% of the workforce, well above the 24.9% at the height of the Great Depression. In the UK I saw a jobless figure of 21% quoted. These may be worst case scenarios – the damage will depend on the extent of company failures and the ability of governments to provide lifelines to protect jobs. Everyone wants support from the government but surely there are limits and they can’t save all businesses. Companies that do survive will see earnings slashed and dividends cut. That will feed through to lower share prices. The point is that eight weeks or so into the crisis it is still too early to assess the extent of the real damage to the global and UK economy. Investors are advised to remain cautious. The current rally may be followed a further sell-off.

The content of this blog are my own views.  It is intended as general investment information only.  Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.

March meltdown – How bad was it?

March was a very difficult month for investors, their advisers and fund managers and everyone is glad April is proving to be much better for global stock markets with a strong bounce in returns. However with the FTSE 100 trading at 5,773 as I write, the index of the UK’s largest companies is still well below its January peak of 7,675 on 17/1/20 exactly three months ago. That is a decline of almost 25%. It should be noted however that FTSE 100 index is not necessarily a good proxy for assessing global equities, the UK economy* nor the multi-asset portfolio that you may have. This is due to the index’s high weighting in oil majors, miners and banks, highly cyclical and economically sensitive sectors. In contrast the much broader MSCI World Index** priced in US dollars was down 18.7% over the same period.

There has been plenty of comment and discussion as to how bad this crash has been and when you hear comparisons with the 1929 Wall Street Crash, the Great Depression that followed in the 1930s and economic statistics worse than the global financial crisis of 2007 – 2009 we know this is serious. So how does the current bear market compare with earlier major crashes? An answer lies in the interesting and highly readable blog post written by Nick Maguilli:

Nick’s blog “Of Dollar and Data,” focuses on personal finance with an emphasis on data analysis. In his article on 1/4/20 he argued March was the craziest month in stock market history. He was writing about the US stock market here. By craziest he didn’t mean it was the worst performing month. Let me explain his thinking . The worst month was in September 1931 when the Dow Jones lost 30.7%. March 2020’s fall of 13.7% ranks only 16th worst since 1915. Maguilli defines his term craziest in reference to the  cumulative absolute percentage change. For example if the market falls 3% on day one, gains 2% on day two and falls 4% on day three the cumulative absolute percentage change is 9% over those three days. The total change in March was 117% and with just 22 trading days that is an average daily movement of 5.3%! The next highest average absolute daily change was 3.8% in October 2008 at the height of the global banking crisis. March 2020 also recorded the highest VIX ever. The VIX or so called fear index is a widely cited measure of volatility, although it only started in 1993. I am pretty sure the same phenomena could be observed in UK and other global markets.

The question now of course is what about the future? The current or pending economic recession or depression (the jury is out as to what will be the most accurate description) is unique in that the cause has been a pandemic rather than a financial collapse caused by systemic risk and excessive debt in the banking system as in 2007-2009 or from inflated asset prices as in 1929 and the early noughties when the technology bubble burst. Moreover it is unusual that the global response has been to shut down the economy. In all other recessions logically you want the public to go out and spend and support businesses. We are in uncharted waters and it is unclear whether the easing of the lockdown and the gradual re-opening of the economy will merely lead to another spike in the Coronavirus, at least until a vaccine is found. That could take 12-18 months. In the meantime businesses will fail, unemployment will spike, the economy will contract and company earnings and dividends will be slashed. Stock markets won’t therefore react well and that is bad for investors. Various commentators I have listened two warned about the false signal stock market bounces may give. They are not uncommon in bear markets whilst the bottom may not be reached until investors capitulate and just sell out of desperation. We have not reached that point yet so we could see a reversal of the April gains.

So what’s the good news. The seemingly unlimited monetary and fiscal stimuli from central banks and government has been unprecedented and should help to support the global economy and limit the long term damage. The teeth of the bear may prove to be no match for the big bazooka. The other point to note is that bear markets tend to be relatively short compared to bull markets, typically 12-18 months. The equity bull market that has just ended lasted for 11 years. Of course this bear market may be different if the economic slump is deep and prolonged as in the 1930s or in the 1990s in Japan. I can’t honestly conclude we have seen the worst yet although that is not a reason to sell. Hold tight.

*The FTSE 250 is composed of companies that are more reflective of the UK domestic economy than the FTSE 100 index. Around 70% of the earnings from FTSE 100 companies are derived from outside the UK.

** The MSCI World Index is an index of 1,643 large and medium sized companies across 23 developed markets. It is frequently used as a benchmark for global equities.

The content of this blog are my own views.  It is intended as general investment information only.  Nothing in this article should be construed as personal investment advice for example to buy any of the stocks highlighted. You should seek individual advice based on your own financial circumstances before making investment decisions. Thanks to Nick Maguilli who gave permission to quote from his blog.

Markets like a cat on a hot tin roof

Cats are featuring a lot in this stock market sell-off. Type cast as the proverbial dead cat bounce, global markets are now showing real signs of life. However our investment cat appears to have stepped onto a hot tin roof as equities are jumping all over the place. Overnight Bombay’s BSE Sensex index rose 8.97% and Hong Kong gained 2.12%. As I write the FTSE 100 is up 1.54% whilst the more domestically focused FTSE 250 has rallied by 4.24%. It is however only when you look at individual stock prices that you see the extent of the extraordinary price movements. AJ Bell Youinvest, a direct to consumer platform send out a lunchtime market news e-mail to investors. Today they reported Cineworld was up 35.4% despite shutting all cinemas in 10 countries and suspending its dividend. House builder Vistry gained 15.1%. Premier oil rose 18%. Traders are looking at company specifics and identifying buying opportunities in the bear market. There are reasons to buy other than low prices, in some cases this is due to demand created by the pandemic.

The general upward trend of equities in the last few trading days reflects optimism that new coronavirus cases and deaths have fallen in various countries, though not in the UK. None of us are epidemiologists and it is far too early to say how long the economy will remain in lockdown. Expect more ups and downs in markets in the meantime.  Volatile share price movements are a trader’s friend although their short termism is not a recipe for sustainable price rises. Tomorrow may be another bad day for markets.

The content of this blog are my own views.  It is intended as general investment information only.  Nothing in this article should be construed as personal investment advice for example to buy any of the stocks highlighted. You should seek individual advice based on your own financial circumstances before making investment decisions.

Did you get a tin of baked beans?

I am not asking about your shopping experience here but I do hope you have been able to get your essential food supplies amid all the supermarket queues and panic buying. What I mean here is did your various multi-asset and other defensive investments do what they said on the tin and protect your capital during this sharp sell-off? Yesterday I undertook some analysis of performance of the funds I have frequently advised to see how they have done in the past year. I decided to focus on performance in the last 12 months rather than the last one month for several reasons. Firstly cautious risk funds that have performance targets, (many do not), normally state that positive returns are expected over a cycle, typically around three years. They don’t claim they will deliver absolute returns over all time periods, notably shorter ones. Secondly I wanted to see the effectiveness of the gains in the previous 11 months in cushioning the subsequent losses. After all 2019 was an excellent year for investors. Good cautious risk funds must be able to capture some of the market gains in the good times in order to insulate investors during subsequent downturns. I wanted to test this theory. However to be fair I did not want to look at three year performance to avoid too much of the upside masking the recent losses.

Here are my findings with all performance data from Trustnet (24/3/20) unless otherwise stated. The returns do not take into account the very sharp rises in shares yesterday. For example the FTSE 100 was up more than 9% and the Dow Jones rose by more than 11% on hopes of a $2 trillion stimulus package in the US. Remember it could prove to be a tin of baked beans bounce.

The figures in brackets are FE fundinfo Risk Scores. FE is Financial Express. These are measures of fund volatility over three years relative to the FTSE 100 index, which is used as a benchmark. The FTSE 100 index’s rating is 100, so a fund with a Risk Score of 45 has experienced 45% of the volatility of the FTSE 100 over the last three years. Bear in mind volatility is not a measure of absolute risk or losses. It just tells us something about the extent of the ups and downs of the fund’s share price. For the technically minded amongst you it is a type of Beta.

For comparison the FTSE 100 Total Return (TR) in the last year was -27.48% (Source: The total return index includes re-invested dividends. In contrast the spot price of gold rose 24.5% since 31/3/19 (Source:, showing the benefit of investing in assets that are non-correlated to equities.

Mixed Investments (20-60% Shares)

Axa Global Distribution-7.5%(51)
Artemis Monthly Distribution-14.2%(62)
Investec Cautious Managed-20.0%(57)
Liontrust Sustainable Future Defensive Managed -4.3%(46)

Multi-asset funds vary significantly in their asset allocation and fund management style and there is a wide disparity of returns here. Bear in mind too these funds can in theory invest 60% in equities and so many are still fairly highly exposed to equity market movements. I am happy with the returns of the Axa and Liontrust funds but not those with double digit drawdowns.

Mixed Investments (0-35% Shares)

Fidelity Multi-Asset Income-9.2%(48)
Royal London Sustainable Managed Growth -1.4%(37)
Vanguard LifeStrategy 20% Equity -0.3%(31)

These funds can hold a maximum of 35% in equities but not all do, for example the Vanguard fund. The returns from this and the Royal London Sustainable Managed Growth are good, in relative terms.        

Targeted Absolute Return

BNY Mellon Real Return-7.4%(51)
Argonaut Absolute Return  40.9%(71)
Jupiter Absolute Return-12.7%(30)
Janus Henderson UK Absolute Return 0.7%(38)

These funds had come in for a lot of criticism prior to the crash for their inconsistent returns, their failure to meet their performance targets and capture the upside in a bull market. The Argonaut fund under the management of Barry Norris has had a very bumpy ride and after a period of poor returns he has delivered exceptional performance for investors in the last year.

Direct Property

TM Home Investor1.5%(3)
Time Commercial Long Income4.5%(3)

These very cautious funds invest in physical property rather than the shares of property companies which are much more volatile and like the rest of the equity market have been hit hard in the sell-off. The TM Home Investor invests in residential UK property and the Time Commercial Long Income in long leases and ground rents. Both funds are now closed to new investors and sellers due to uncertainty of valuations not due to liquidity problems and lots of investors wanting to exit.

Volatility Managed

Architas Multi-Asset Blended Intermediate  -9.3%(55)
ASI MyFolio Maerket III Platform-12.2%(62)
HSBC Global Strategy Cautious-1.8%(29)
Santander Atlas Portfolio 4-6.8%(31)

Funds in this sector have volatility targets. These then determine the asset allocation of the fund. Congratulations go to HSBC here for capping losses to less than 2%.

One Month Returns

Having focused on one year returns I want to look at the best performers in each sector to see how they did over the last month. This enables us to see how defensive they were in the sell-off itself without the benefit of the good returns in the preceding 11 months.

Liontrust Sustainable Future Managed-15.4%
Vanguard LifeStrategy 20% Equity-8.0%
Argonaut Absolute Return 9.9%
Time Commercial Long Income 0.3%
HSBC Global Strategy Cautious-9.1%

For comparison the FTSE TR was down 26.7% over the last month.

Some of these returns are less impressive and show that even defensive funds with low equity content don’t escape sharp downturns. However like a bear or other hibernating animal if it puts on enough fat during the summer it will survive the winter. A fund that captures a significant chunk of the upside but never loses money in the sharpest of sell-offs probably does not exist so investors have to accept unless you want to be 100% in cash, investment risk will always be an occupational hazard.

Finally it should be said that differential performance of funds in the same sector in the last year will be down to a combination of the calls of the fund manager in terms of asset allocation, stock selection and use of hedging, spiced with luck. To find out why for example the Liontrust Sustainable Future Defensive Managed did so much better than the Investec Cautious Managed will require further investigation – an examination of the contents of the tins. Similarly fund managers will adopt a variety of measures to protect investors during these difficult times. Some may not do anything significant on the principal that are long term buy and hold investors or they entered the sell-off with a very defensive asset allocation. Others will use cash to add to their best ideas at depressed prices in anticipation of a recovery. The next test for them will be to manage their portfolios in a long term bear market and know when to make changes to benefit from the recovery when it finally comes. For investors the general advice is stay invested if you can.

The content of this blog are my own views.  It is intended as general investment information only.  Nothing in this article should be construed as personal investment advice for example to invest in any of the funds highlighted, gold or other safe haven assets. You should seek individual advice based on your own financial circumstances before making investment decisions.

The Prospects for Gold

This morning I listened in to an interesting webinar on gold and its prospects from WisdomTree Investments. A number of my clients hold a gold ETC (Exchange Trade Commodity) from iShares or WisdomTree (formerly ETF Securities). An ETC is a low cost security that tracks the spot price of gold without the investor having to take physical delivery of the metal nor pay for storage and insurance costs.

Gold is traditionally viewed as a safe have asset and hedge against geo-political risk and inflation. The performance of gold is highly correlated to the US consumer price index. Returns tend to be uncorrelated with other assets and gold plays an important role as a portfolio diversifier. Of course one downside of gold is that it pays no interest but WisdomTree made the valid point that this is less of a detraction for investors given globally there is $12 trillion of negative yielding bonds. Finally central banks have been net purchasers of gold since 2011 reversing a multi-year trend of them being sellers.

After a strong rally in January and February gold hit a peak on 7th March of $1,700 per ounce but it has sold-off since. Currently it trades at $1,471 (Source: Bullion Vault, 19/3/20 @ 13.48 p.m.) This is counter-intuitive to its supposed safe haven status, something that has puzzled investors. You would have expected gold to have rallied in the last few weeks with the spread of the Coronavirus pandemic and the damage to the global economy and stock markets. WisdomTree consider that it has been a liquidity driven sell-off which has also affected US Treasuries* another safe haven asset, with investors selling to meet margin calls. These are contractual cash deposits investors must make to a futures broker to maintain their account at a minimum level when securities fall in value.  In other words gold and Treasuries have been treated as near cash i.e. liquid, easy to access money. That makes sense.

Another interesting point was that during the global financial crisis in 2008 the price of gold fell initially even in the aftermath of the collapse of Lehman Brothers. It then rallied from a low of around $735 per ounce in early October to a high of nearly $1,918 in August 2011. If gold follows the same trajectory prices may rise in the current crisis. WisdomTree modelled two scenarios – a V shaped recovery and a U shaped one. In the former the gold price would go higher than today for the rest of the year, peaking at $1,965 in the third quarter and then decline in the first quarter of 2021 to $1,370. With a less favourable U shaped recovery with a longer downturn in the markets, gold prices would go higher for longer breaking through the $2,000 barrier in the next four quarters. These models require making complex assumptions about federal reserve policy, the dollar exchange rate, nominal yields on bonds and speculative positioning forecasts so the numbers must be treated with caution but the conclusion is clear, the case for gold is good and the worse the economic downturn, the more attractive the shiny metal becomes. The nightmare L shaped recovery was not discussed but you can guess what impact this will have on gold.

It must be remembered although gold is a safe haven asset it is  volatile one and there have been long periods were prices were depressed or flat. Other candidates as defensive assets include US Treasuries, UK Gilts, the Swiss Franc and the Japanese Yen. The ultimate is of course cash which is most attractive when inflation is low.

*US government bonds.

The content of this blog is based on my understanding of the investment case for gold.  It is intended as general investment information only.  Nothing in this article should be construed as personal investment advice for example to invest in gold or other safe haven assets mentioned. You should seek individual advice based on your own financial circumstances before making investment decisions.

Extraordinary Times

As investors we are living in extraordinary times. US stocks surged on Friday with the Dow Jones rising by 1,985 points, its biggest ever one day points gain. In percentage terms it was pretty impressive too, climbing 9.4%. The index spiked due to Trump promising stronger government action to deal with the Coronavirus in the US. Normally US markets are trend setters for the rest of the world but not so this morning. Overnight the Hang Seng fell 4.03% and Japan’s Nikkei 225 dropped 2.46% (Source: BBC News. This link is worth bookmarking for market watchers ). Europe has opened sharply lower. As I write at just before 9.00 a.m. the FTSE 100 is down just over 7.5% dipping below the 5,000 level, something not seen for a long time. European bourses have fallen further. Despite co-ordinated action by governments and central banks investors are worried that there is very little ammunition left to combat the impact of the pandemic on the global economy.

Whilst I am sure most individual investors are holding tight, large number of institutional investors must be selling equities at already depressed prices and driving prices lower. I am not sure what they think that will achieve unless they reckon it is a case of selling now or selling later at even lower prices. Do they know something we don’t?

It is clear the global economy will slow sharply. It is now inevitable with the lockdowns in many countries some sectors will collapse. It doesn’t look good for airlines nor the travel and leisure industries, nor their suppliers. Business failures and redundancies are inevitable. Those companies with strong balance sheets and large cash piles should be OK. It will be a case of survival of the fittest. Large scale unemployment will mean many will be unable to maintain mortgage payments and this will impact the banks. If they come under severe financial stress that would become a systemic risk. In conclusion a global recession now looks inevitable. On the positive side modern technology enables many people to work from home whilst orders and demand will be delayed. Not all will be cancelled. A post crisis surge could follow although inevitable permanent damage will means the global economy will not recover to its pre-crisis level.

These are extraordinary times requiring investors to hold their nerve. Some may even be brave enough to buck the trend by investing some cash into the market to buy at very low prices. No-one is talking about the ISA season at the moment. Perhaps they should.

The content of this blog is based on my own understanding of global stock markets.  It reflects my personal views and is intended as general investment information only.  Nothing in this article should be construed as personal investment advice for example to invest cash tactically or use your ISA allowance. You should seek individual advice based on your own financial circumstances before making investment decisions.

Global Stock Market Crash

In my last blog on the 5th March I explained the market rally may be a “dead cat bounce,” jargon used to describe a temporary increase in a stock or index in an otherwise falling market. The rally appears to have life in it but it proves to be an illusion as prices subsequently continue to fall. So it proved. A month ago on 12/2/20 the FTSE 100 stood at 7,534. Yesterday it closed at 5,237 a fall of 2,297 points or a whopping 30.48%. This morning however the FTSE 100 is up 6.45% as I write. Similarly the Dow Jones Industrial Average fell from 29,551 on 12/2/20 to 21,200 yesterday, a fall of 28.25%.

Yesterday was especially savage. The FTSE 100 fell 10.9%, the worst daily plunge since 20/10/87, so called Black Monday when the FTSE 100 fell 12.2%. The Dow dropped 9.99% yesterday whilst European indices were hit even harder with 12% falls in Germany and France and 17% in Italy. These are the worst daily falls in the 29 years I have been a financial adviser and worse than during the bursting of the technology bubble in the early noughties and the global financial crisis in 2008. The only crumb of comfort is the hit to the global economy from the Coronavirus appears to me to be less of a systemic threat. The technology bubble was created by the market setting absurd valuations on businesses with no earnings. This all proved to be an illusion and like a house of cards and the market crashed. In contrast prior to the Coronavirus pandemic company earnings and earnings growth were reasonably solid and valuations generally justified in most markets.

The global financial crisis was due to bank’s excessive debt, weak balance sheets and poor liquidity. Today the banks are much better capitalised and the global financial system seems OK. What the markets are therefore reacting to currently is the inevitable hit to the global economy. Trade and economic growth will slow and some countries will go into recession, however orders and demand will remain and back-up until the crisis passes. In some sectors at least there will be a post-crisis surge, although the lull if prolonged and sharp will lead to job losses and business failures. Cue government support.

If I am right about the low level of systemic risk the question is what happens when the pandemic wanes and ends? Logically if the markets were right on stock valuations prior to the crisis you would expect a sharp rally in prices after the crisis– a rubber ball bounce! That said there is no other way of putting it, your portfolio valuation currently looks awful. However unless you are invested 100% in equities your portfolio would not have fallen as much as the 30% drop in the FTSE 100 index in the last month. Many of my clients hold multi-asset, bond and other cautious risk funds or gold and these investments would have cushioned the falls to some degree.

The other point to make is the depressed values of your holdings and losses are paper figures. They only become real losses if you crystallise them by selling out at current prices. It would be the worst thing you could do and if you have retained a sufficient cash reserve you should not need to be a forced seller. Even if you must sell funds due to an immediate requirement for money selling defensive investments will cap losses. For the brave now may be an excellent time to invest cash. If you are thinking about ISA contributions for 2019/20 you will certainly buy at low prices. For most investors however the advice is as repetitive as that about hand-washing – do nothing, stay invested for the long term and wait patiently for the recovery.

The content of this blog is based on my own understanding of global stock markets.  It reflects my personal views and is intended as general investment information only.  Nothing in this article should be construed as personal investment advice for example to invest cash tactically. You should seek individual advice based on your own financial circumstances before making investment decisions.