In this climate of uncertainty, punctuated by frequently bleak financial news, even the most unshakeable of investors is likely to feel apprehensive.
That’s why we’re doing all we can to calm fears and strengthen resolve among our investors and partners. Throughout the Covid-19 outbreak, we have adopted a two-pronged approach: working around the clock to ensure our clients’ investments achieve the best possible performance and strategic positioning, while providing investors with reliable information and valuable insights.
We believe that building awareness of the market forces at play and examining the potential parallels found in historical instances of market drops can provide much-needed reassurance.
With this in mind, The Financial Options Group recently welcomed investors to participate in a virtual meeting, co-hosted by Group CEO Christian Pepper and presented by Brewin Dolphin’s Divisional Director of Wealth Management, Charles Berry.
Based on reliable data from leading global organisations in the worlds of healthcare and financial affairs, Charles’ expert analysis included a comprehensive appraisal of the current economic climate and financial markets, and what may be expected as the UK and global economies seek to reopen and recover.
Here are just a handful of the key points covered during the meeting:
Comprehensive economic data is in short supply.
“We’re just starting to see the economic data coming out on how bad this is going to be for the Western world,” explained Charles. “Losses to the economy of as much as a third in Q3 have been forecast by OBR (Office for Budget Responsibility) and a fourth of the economy in the same period by Goldman Sachs, but these are speculation. Much remains unknown about how big the hit to the economy will be.”
The timeline of the containment measures is critical.
Charles provided an analysis of business expectations as revealed by recent PMI (Purchasing Managers’ Index) and Initial Jobless Claims figures, which indicate a profound economic drop in the second quarter of this year, likely to be more damaging to global economies than the recession of 2008.
However, the relationship between jobless claim figures and the significance of the market drop is relatively weak.
“When the biggest ever recorded jobless figures came out, the market went up”
noted Charles, explaining that the length of the economic shutdown is a more a salient factor.
There is a very tight relationship between the length of the recession and how big the drop of the S&P 500 will be. The reason for that is relatively straightforward: the longer the recession goes on for, the more businesses will likely go under, more people will likely go out of business. Essentially it will be those two things that determine how big of a hangover we’re going to have when we come out of this recession.
But this is not a recession caused by a huge imbalance in the economy from one sector to another. This is a manufactured recession caused by governments closing down their economies, so it’s reasonable to think that while you would usually have to wait for those imbalances to work their way through for things to start to recover, that when containment efforts are loosened the recovery can start in earnest. So when that is likely to be is the first thing we really need to focus on.
Expect a V-shaped recovery.
The shape of the drop will almost certainly be V-shaped, however a full recovery is not expected until Q2 2021, explained Charles. Recovery will depend on critical factors such as the magnitude of second order effects, particularly in job losses and businesses defaulting (going under). There are large numbers of people in industries whose employment has been directly affected by governments shutting down, particularly in areas of air transport, leisure and hospitality and others which have been directly affected by the collapse in the oil price.
“There’s a clear relationship between the oil price falling and the amount that investors have been demanding to lend money to them, which has skyrocketed”
added Charles.
“This is a function of people’s belief about how these businesses are likely to fare – there’s a higher probability of these businesses defaulting.”
Thus there’s a need to keep a close watch on these areas. “Our opinion about this is that the measurements taken by governments around the world, the fiscal policy that’s been enacted and the monetary policy that’s been enacted by central banks, should be enough to limit these second order effects. Businesses will fall through the cracks, and it’s inevitable that there will be some second order effects, but what politicians and central bankers could be accused of in the global financial crisis, i.e. they were too slow to react, you certainly couldn’t say that this time. They have been extremely proactive in getting ahead of these things, which should mean the second order effects are somewhat limited. The second order effects which occur however will mean that while we are expecting it to be a V-shaped recovery, it’s highly unlikely that the economy gets back to where it was at the beginning of the year by the end of this year.”
Recovery will be stagnated.
If Covid-19 re-emerges this autumn and in 2021, there may be further downturns yet to come, albeit smaller in size. “The stock market doesn’t wait for the data to come through before it reacts in either direction; it’s looking forward, predicting what will be and reacting to that,” said Charles. “We can anticipate it’s going to be a volatile couple of months, and as that comes through it’s likely you’ll see sideways choppy trading from the markets but then as the light at the end of the tunnel comes into view the markets should move steadily higher.”
Staying focused on the longer term is vital.
“A quote from Rob Arnott of Research Affiliates tells us that, ‘In investing, what is comfortable is rarely profitable’. I think this is incredibly pertinent right now. It’s never comfortable to be riding through these periods and seeing the markets changing, particularly with the ferocity and speed with which they’ve changed this time, but it’s in these periods where people no longer think rationally, where people sell things that have dropped 30 to 40 per cent. And it’s on these occasions that investors keeping an eye on the longer term can build value.”
Christian Pepper commented:
“Although it’s very common in periods of uncertainty for some investors to get jittery, making the market less predictable in turn, we know that historically the investors who have shown resolve in riding out periods of decline in the markets have seen their investments recover. Exiting the market or switching to cash in an attempt to reduce further losses may turn out to be debilitating in the long run, therefore we recommend speaking with a financial advice professional rather than making a decision out of impulse.”
To discuss your saving and investment options and objectives with an experienced financial adviser, email info@financialopts.co.uk or call 0161 764 9944. For more information, visit financialopts.co.uk.
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