Present market conditions

Since the last review the Covid-19 Coronavirus has erupted around the world creating a pandemic, this has had the unfortunate effect of causing the markets to fall drastically. The markets are clearly worried about the short-term effects on the world economy and are therefore pricing in a recession, which is likely to happen in the next 12 months.

The FTSE 100 has fallen from a high of 7686 to its present value of 5237 as of 12/3/2020. This represents a fall of 32% and is officially a crash. This figure will be very different even by the time you read this due to the extreme volatility, however, there is no way we can predict this.

Whilst the present situation is certainly not good it is our opinion that the markets have overreacted somewhat. The virus will of course disrupt things over the next 12 months, but it appears very unlikely that the UK economy will reduce by 32%, which is the markets reaction so far. We think the market ignored the virus for the 1st month, then suddenly realised it was going to be a pandemic, then overreacted. Obviously, the pandemic is going to disrupt things for a while, but it will pass by and hopefully there will be a vaccine before Christmas. Once the markets can see that things have peaked, and there are signs of the virus spread slowing down globally, then we would expect the markets to steady. Until that point, we would expect more volatility. The whole situation is difficult to predict since this type of problem hasn’t occurred since the Spanish Flu in 1918/19 and the world was a very different place then.

There are some glimmers of hope as it already appears China, Hong Kong, and Singapore have managed to see a reduction in new cases. This doesn’t mean an instant recovery as even if these areas get a grip on the virus completely, they will still be concerned with the knock-on effect to their economies and those of the rest of the world. However, we do feel that the areas that have been hit first will be those more likely to show the green shoots of recovery. In essence we think the market is just getting used to the virus now, the initial shock has hit the market and there has been the instinct reaction. We believe the market will remain volatile at least until the summer.

With regards to property, this asset class is subject to the potential for fund managers to instantly reduce the price and possibly suspend any money in or out of a fund as a protective move. In this instance the money would be stuck. Due to the virus and the market volatility we simply wish to avoid markets that are illiquid.

Asset Class Review

Equities

These markets have been hit badly with the recent worries over the Coronavirus. We expect further volatility and the market to remain in the doldrums until the US has peaked, which is presently behind the rest of the world. We expect this volatility to continue for a few more months and the markets could fall further yet. One thing to consider is there could be some long-term value in the market right now.

Bonds / Government Debt

This market has performed particularly well as these types of securities are deemed to be a ‘safe port in a storm’, and as a result the market has risen significantly these past two weeks. The main reason for the rise in this sector is the reduction in interest rates across the globe and when rates fall the value of Gilts rise. The US has reduced interest rates by 1% at a time when the virus is only affecting 5.5 people per million compared with Italy at 250 per million. As at the time of this review (13/03/2020) We believe there is still potential for the USA to get much worse and therefore this could lead to further interest rate reductions.

Gold Miners

Over the past 2 months the gold mining funds we hold have also been subject to volatility. They have in effect had conflicting factors, the virus creating insecurity which should stimulate gold verses the fact that the dollar is rising, which has a negative effect on gold. We do instinctively feel that we need to keep this fund intact, as these types of funds usually do well in recessions.

Property

With regards to property, this asset class is subject to the potential for fund managers to instantly reduce the price and potentially suspend any money in or out of a fund as a protective move. Because of the virus we don’t wish to risk this fund yet.

Emerging Markets

These markets can be unpredictable, and this area of the world is still insecure right now, so we wish to leave this market alone for the present. We are only prepared to invest into these regions via Asia or Global funds at present and not directly.

We are recommending switching some equities into China as it was the 1st country to have the virus and it seems to be in control of it now. We therefore think it will potentially be the first to recover so we are purchasing a small percentage into China for that reason.

Cash

In our lower risk portfolio’s, the level of cash is already relatively high due to the uncertainty in markets. We intend to keep relatively high holdings in this sector which can help stabilize the market in times of unpredictability all around it. This sector of course does not grow so once we can see the markets recovering at future reviews, we will start to sell down some of this sector.

Absolute Funds

These funds ‘hedge’ the volatility of the market by buying long and selling short so reducing the overall risk, protecting against the falls and thus reducing the volatility. This sector has fallen but not as much as the equity markets due to the hedging effects of part of the fund.

Infrastructure

This fund should do well in a recession however some infrastructure projects may be cancelled due to lack of funding and staff shortages as this will not be a normal cyclical recession, but a technical recession caused by the Coronavirus. We don’t think this sector could be too predictable at present, so we are reducing our holdings.

Overall

The Coronavirus has spread around the world starting in Asia, then Europe and latterly the USA. As a result, the world equity markets have fallen and countries may have to go into lockdown. We believe this will plunge the world into a technical recession. Markets are likely to remain down in the dumps until ‘the light at the end of the tunnel’ is seen, we are not there yet. We have no real way of telling if the market is near the bottom or not, selling out could miss any bounce and remaining could mean further. In effect we are caught between the devil and the deep blue sea.

By way of some reassurance, every crash has recovered usually within 12 months sometimes longer, so we do expect a recovery at some stage in the future, but that part is unpredictable, but we hope its sooner rather than later.

The fund performances rounded down to the nearest 0.5% as of 12th March 2020 over both 1 and 3 years are as follows:

  • Portfolio 3 has grown by 2% and 6%
  • Portfolio 4 has grown by 4% and 8%
  • Portfolio 5 has grown by 4% and 8%
  • Portfolio 6 has grown by 3% and 9%
  • Portfolio 7 has grown by 3% and 10%
  • Portfolio 8 has grown by 2% and 10%

Please note due to present levels of volatility these figures may differ significantly day by day. Please be aware your actual returns will be lower due to your annual 1% advice and portfolio fee.

We would like to make you aware since our last review dated 16th January all portfolios have fallen by more than 10%.

Summary

All our portfolios are still showing a small profit year on year, but most of the gains have now been wiped out. We intend to switch a small percentage from US and EU equities into China just because they have had the virus first and we would anticipate coming out of the doldrums first. We have made slightly defensive moves to the portfolio but not too much as it is difficult to determine where the market will go in the next two months. The market has dropped and thus now appears to be a poor time to panic and sell down to cash. You can choose to sell down to cash if you wish, this will prevent further falls, but will remove the potential for any recovery in the future. Also, your risk profile would need to drop to 1 out of 10 from your present level.

We therefore are uncertain as to where the market will go over the next 2 months but are slightly more cautious than optimistic. More importantly we hope you all keep well and if you do get the virus then your symptoms are mild, good luck for the next couple of months.

Please be aware that all portfolios are lower risk than prescribed due the exceptional levels of market volatility because of the exceptional circumstances caused by the coronavirus. This will give you a little more protection than you would otherwise have.

For our Portfolio Clients, Recommended fund adjustments:

New funds

Ballie Gifford China

We have chosen to use a fund manager to manage this fund which will need to be approached with care. We have recommended this fund as it has a good reputation. This has a 4-crown rating it has been top quartile over 1,3 and 5 years. The fund manager is experienced having run this fund for 10 years and over a long period has consistently outperformed his peep group composite 9 years out of a possible 10.

Funds to increase:

Cash

We are adding slightly more into cash to reduce the overall portfolio risks, we dare not put too much in in case the markets suddenly recover drastically in the next 2 months, this could happen if the virus starts being controlled as the weather warms up during spring. However overall we are slightly more pessimistic than optimistic for the next 2 months thus a small increase in cash we believe to be prudent.

Funds to reduce

Vanguard US Equity Index

We are reducing our exposure to the USA as we think they have worse to come with regards to the virus, as a result we are reducing some of our US holdings. There is no other reason to reduce holdings in this fund

M&G Global Listed Infrastructure

We are reducing this fund as we are concerned that any infrastructure projects may be disrupted by staff shortages. Business and governments may cancel projects if money is used up supporting the economy whilst the outbreak is occurring. Consequently, we are only selling part of this fund because if we go into a recession the governments may spend more on infrastructure to create jobs in the future. As usual things are very difficult to predict in a very unusual situation. We again are selling this fund for strategic reasons not based on the quality of the fund.

Vanguard FTSE Developed Europe

We have reduced this in most portfolios other than for Portfolio 3 & 4 where there are low holdings already. We are recommending lower holdings in Europe as it is spreading rapidly throughout the continent. We are totally dumbstruck as to the way Italy have managed the virus and are concerned that that the rest of Europe may act similarly. So again, we think worse to come and thus a reduction in assets..

Brooks MacDonald Defensive Capital

This fund is an Absolute fund designed to ‘hedge some of the risk’ that does not mean the fund has not gone down it has merely gone down less. We therefore are concerned our asset allocation into this fund is too high and we would prefer to hold more cash throughout this awful time.

Jupiter India

We are reducing this fund due to market volatility. This fund is of high risk. We feel it would be prudent to mitigate against the volatility by reducing one of our high risk funds within the portfolio that has also performed below our expectations.

Baillie Gifford China

Brooks Macdonald Defensive Capital

Jupiter Distribution

Fundsmith Equity Fund

Fidelity Asia Pacific Opportunities

Vanguard US Equity Index

Vanguard FTSE Developed Europe ex-UK Equity Index fund.

Baillie Gifford American B Acc Fund factsheet

Vanguard LifeStrategy 20% Equity

Blackrock Gold & General

M&G Global Listed Infrastructure

Vanguard FTSE UK All Share Index

Vanguard Lifestrategy 40% Equity

Vanguard UK Investment Grade Bond Index

Fidelity Cash

Lindsell Train Global Equity

Lindsell Train Japanese Equity

Jupiter India

Schroder US Smaller Companies

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