We have refrained from making comments about the markets and the value of your investments until now, to try and gauge if there is some consensus of opinion. Having considered views of a range of economist and noted government policies, we thought it might be helpful to provide you with some comment and context.
Since the financial crash in 2008, we have enjoyed a rising bull market for over 11 years. It was perhaps inevitable that a ‘correction’ would happen but, as is often the case, the cause and effect may have been unforeseen, like one of Donald Rumsfeld’s ‘unknown unknowns’.
We now all certainly know about the Coronavirus (Covid – 19). Of course, what we don’t know is the course that this virus will run and how it will affect our health, our personal lives or the future of our economies. It is this lack of knowledge and uncertainty which has driven the rapid fall in asset prices over the last seven days.
As I write this, markets continue to slide but not quite at the rate of previous days and in the interim, we have seen some rallies. Markets hate uncertainty and in falling markets they perceive increased risk with every release of new data and news. These moves can be exacerbated by digital, algorithmic trading and activities such as short-selling. However, stock market authorities are stepping in to limit some of the damage caused by short-term trading. Nonetheless, these circumstances also offer potential investment opportunities for long term investors. Even now, investment managers are actively looking at the reduction in markets to identify investments which they feel represents good long-term value and ‘buying the dip’ as part of their long-term investment policy.
Stock markets are pricing in their concerns about reduced economic activity, loss of profits and the viability of business models. It is often said and generally evident, that in the advent of such shocks, stock markets over sell and then, probably, over buy on the upswing. This means that when things are looking down, they’re over pessimistic and equally over optimistic in a recovery period.
Whereas the financial crisis of 2008 was a ‘systemic’ risk, relating to the very core of financial markets, the impact of the Coronavirus is a different type of risk. It is potentially manageable, finite and for which a solution might be found. The main risks in relation to financial markets arising from the Coronavirus are not immediate health implications but rather, the impact that it has on how we live our lives. The uncertainty is not so much around whether a vaccine will be found but as to when we will resume our normal consumptive behaviours. Because it is those behaviours which oil the machinery of our modern economies and drive profit across all sectors.
A further highly important component of any potential road to recovery is the support available from global governments and financial institutions. It is this sort of action which can give the markets confidence that the worst outcomes of the Coronavirus could be offset, businesses protected, individual spending power maintained and economic activity reinvigorated.
Therefore in the short term, we are likely to still continue to see increased volatility in stock markets and further reductions in asset prices. However, if we see the successful tackling of this crisis in 3 to 6 months, then the opportunity arises for a return to more normal living and working patterns and even a vaccine ahead of the 2020/21 flu seasons. If the contagion runs through the summer and into next year then we can expect a prolonged period of uncertainty in markets as well as in life as well.
How have your investments fared and has investing ethically helped protect you against the worst?
In recent days, you could hardly avoid the barrage of negative news relating to falls in global stock markets. An oft quoted reference point is the FTSE 100 which is the measure of the largest 100 companies in the UK. Whilst this represents 81% of market value in the UK, it actually provides a fairly skewed picture of overall economic activity or the sort of portfolio that you as an investor actually hold. In addition to this, it is a highly concentrated index in which much of the value concentrated in the top 10 holdings which feature mainly oil, banking, pharmaceutical and tobacco mega-corporations. I can state with reasonable confidence that any investments recommended by Ethical Futures would not be holding significant allocations to FTSE 100 stock and in particular would avoid carbon intensive or health impacting businesses such as oil and tobacco.
On a brief initial review of typical Ethical Futures fund recommendations, we do note that they have by and large fared better than their mainstream peer groups. Looking forward, we hope they will also be better positioned to recover and grow in the future. This in part reflects the fact that most funds adopt a positive investment philosophy. That philosophy will often be focused around investing in particular pillars of economic activity such as renewable energy, but also healthcare, biotech, education and efficiency sectors in both data management and software for business applications. It’s therefore quite likely, that holdings in your investments might right now be contributing to research on the Coronavirus, gene sequencing or providing valuable equipment in the medical and biomedical environment.
A further point to note, is that the bulk of our investment portfolio recommendations are based upon a broad asset allocation which incorporates investments in fixed interest, corporate bonds, possibly commercial property and a wide range of individual equities across a number of markets. The allocation will often limit your overall exposure to equity markets (which are more volatile) to less than 50% of your total holdings and in some cases significantly less. At present, falls in investment portfolios seem to vary from 5% to 15% of value, dependant on risk tolerance taken. These are moves that we would expect in this sort of scenario.
I know that some clients will have received notification of a 10% drop in value. This is due to new regulatory requirements which require investment companies to notify investors of a fall of 10% or more since your last investment valuation. The purpose of these communications is therefore not to alarm you, but simply to let you to this change in value.
When we make investment recommendations, we assess capacity for loss and risk tolerance. We therefore hope that this relatively rare occurrence does not unnerve you too much. I’m sure by now, our clients would expect us to say this, but the answer really is to sit tight and wait for what I’m sure will eventually be a recovery in values.
However should you wish to discuss your investments in greater detail, please do contact Martin or myself.