Economic Commentary - What Next?


Eight months on since Coronavirus became widespread, and 5 months since the UK went into Lockdown, it is a good time to take stock and reflect on the world we now live in.  Across the world, Governments have had successes and failures, and we should not expect them to get everything right when any significant international event, in this case a new virus, appears.  As more information is known, we are seeing Governments better equipped to deal with the crisis.  Whilst every death is a tragedy, the Lockdown was successful in its main objective to protect the NHS from the first wave of the virus, and now better equipped to deal with local breakouts.

We are not presuming a second wave of the virus, but would throw caution to you and your family, that the virus has not gone away and it is likely we are in for some more difficult times ahead.

The Government deserves some praise; firstly, for the furlough scheme, an unprecedented move by any UK government and secondly, for pledging to do whatever it takes to ease the economic fallout of lockdown.  What the aftermath of the Global Financial Crash taught us, is that Central Banks pumping money into the system alone, is not enough and we need to see specific spending pledges direct to business and the consumer, to start moving the economy forward again.

However, there are some big challenges that the government must face up to, whilst at the same time planning for second waves and large local outbreaks.  Of course, people’s health is paramount, but the longer these issues take to address, the longer it will take us to recover:

  1.  Fear

Naturally, consumers are now more cautious than they were before, and we think it will take a long time for this to recover.  Firstly, with the virus still in the community and social distancing likely to remain, people are using the high street less and less.  On top of this, with the furlough scheme coming to an end and people rightly worried about their jobs, the natural thing to do, would be cut back spending.

  1. Recession

The UK is now officially in recession for the first time in 11 years, and the UK economy officially fell 20.4% in the first three months of the fiscal year [April to June] and we have seen the biggest spike in unemployment since 2009. Whilst there is recovery underway, it is uncertain how fast economic growth will regain the ground that was lost.  Businesses have been kept afloat by government intervention, which cannot last forever, and the prospect for further unemployment rises is significant.

  1. Central Bank Tools

Governments and Central Banks are raising even more debt to pay for this crisis, even though most of the ammunition had been used to reduce the impact of the 2008 Global Financial Crash. Even with interest rates now at record lows, we are not expecting to see the Bank of England turn them negative.  This new round of spending will have to be paid back!

  1. Leaving the European Union

The UK officially left the European Union on January 31st with a transition period in place for 11 months and time is ticking.  By January 2021 we will either exit transition without a trade deal or start an agreed future trading relationship.  Either way, major changes will take effect on January 1st no matter what the outcome of the trade negotiations, which businesses and consumers will have to navigate, on top of the Coronavirus problems.  

The Gould Financial Planning Investment Committee do not anticipate any ‘V-shape’ recovery; the economy will rise and fall in waves, as local outbreaks manifest themselves, depending on their severity.

One thing is certain, we are in the midst of a social and economic revolution; changes to the way we live and behave that would normally take decades, happened instantaneously.  This leads us to ask the question: How will the UK and Europe recover from this crisis?  Policy statements from the UK and European Governments would suggest that a Green Recovery is on the table, and both are serious about changing society. Both are already focusing on the following:

  1. Energy efficient buildings

Having spent more time at home than ever before; the need to improve housing quality will come to forefront.

  1. Food & Agriculture

Here we see two problem; firstly, with income insecurity comes food insecurity. This will need to be addressed. Secondly, with obesity on the rise and having an aggravating effect on COVID-19 we see a push towards healthier diets, and alternatives to traditional diets.

  1.  Commuting

There is a risk that transport will return to previous norms of traffic jams and air pollution. But with so many businesses adapting to working at home, less air travel and people’s reluctance to use public transport, we see an opportunity to change how people move.

  1. Infrastructure

Significant sums are already spent on projects worldwide. But more investment is needed to ensure access to housing, mobility, services, and greenspaces for all.  With less demand for oil-based energy, we see renewable energy infrastructure and the demand for alternatives to increase.

The Gould Financial Planning Investment Committee have decided to offer an Environmental Social Governance (ESG) tilt within our portfolios, whilst keeping the core fundamentals of our investment proposition.  This is very much a case of evolution and not revolution; and we will not shoehorn funds with an ESG bias onto our shortlist, just to fill a gap.  These funds will still have to pass our rigorous screening process before they will be considered.

 

Asset Allocation Review.

Looking ahead for the next 6 months and beyond the Gould Financial Planning Investment Committee are recommending the following:

 

Cash

Cash continues to represent poor value, with the likelihood of interest rate increases now diminished. In some quarters of the Bank of England they have even discussed the possibility of negative interest rates!  Cash remains a useful tool in protecting against short term volatility, but over the longer term is unlikely to generate above inflation.  We would reiterate the following:

  1. Ensure a sufficient emergency fund is kept
  2. Clearing debt and reducing interest payments is a form of saving

Verdict: Neutral

 

Loans and Debt

With the prospects of low or even negative interest rates for the foreseeable future, we do not see traditional government debt or corporate debt as an attractive place to invest.   We are reducing our exposure to “floating” debt which would not have been adversely affected by rises in interest rates, in favour of long-term secure income, with inbuilt inflation protection. Verdict: Neutral

 

Property

Significant changes are happening in the property sector, with demand for retail falling further. The Coronavirus Pandemic has accelerated the decline of the traditional retail assets.  We are focusing on future proofing Commercial Property, using funds where they are purchasing assets for the next 20 years demand (smart warehousing, GP surgeries/Care Homes).  Our primary focus will still be on infrastructure assets, as we believe the demand for these assets will continue to grow. Verdict: Neutral – but move away from traditional property investments

 

Mixed

We continue with our three strategy approach in this space, looking to some fund managers that perform well when markets go up, some that should hold their value when markets go down and finally managers that look to generate returns irrespective of how markets are performing. Ultimately we are looking to employ fund managers with boots on the ground, across all asset types looking for the best value. Verdict: Neutral

 

UK Equities

Our initial thinking at the start of 2020 was that, with political uncertainty subsiding, there may be a case to increase allocation to UK Equity, but we were unsure of how the trade negotiations were going to play out.  This remains uncertain, but irrespective of what happens with the trade negotiations, there will be changes for UK businesses, consumers, and travelers to navigate.  Moving forward 8 months, we have witnessed a fall in UK GDP by a record amount due to the Lockdown strategy, and unemployment looks set to increase. 

We are sticking with our approach; passively tracking the market coupled with a small group of quality UK Fund managers that look to protect values in falling markets.  We are, however, adding fund managers that have a mandate to pick out individual distressed businesses that have the scope to recover their share price and value during the post-Covid period. Verdict: Neutral

 

Global Equities

We are still recommending that clients hold a diverse Global Equity allocation, and our starting point is to remain underweight in the US.  Holding US exposure in line with a  global index means having almost 60% exposure to US equities, and the issue we have is that the US equity market is dominated by the FANG’s (Facebook, Amazon, Netflix and Google) which have a combined value in the region of $4 trillion.  To put this figure into context, that is bigger than the combined value of every German and French equity!  As fund selectors, we want to include more diversification into client portfolios.

Our support for themes and investments for the future remain strong, and we will continue to allocate money to this space.  Gold has performed as expected during this volatile period, and whilst the gold price is higher than previously compared to the Dow Jones Index, it has not reached all time highs, and we are therefore looking retain investment in gold but take some of the profits. Verdict: Neutral

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.






Article published: 24/08/2020

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