2020 is under way and volatile!

2020 is well under way and many markets have seen volatility over the first two months.

With Brexit now 'done' and the start of our departure from the EU now confirmed on 31 January 2020, the real work begins in negotiations between the UK and the European Union, although strains seem already to be showing. Will the 'Twenties' be roaring? No-one knows, but we certainly have moved into a new era, in terms of time, politics, our climate – and, following the General Election at the very end of 2019, our relationship with the EU, in whatever form this takes, is likely to evolve rapidly. More dynamic UK economic positions may be unveiled at the new Chancellor's first planned Budget on 11 March 2020, with a swift change in management at Number 11 in the recent re-shuffle.

Brexit took over 1,300 days and three Prime Ministers to be completed in January 2020. It has affected most aspects of our lives, and investment is just one of many examples, with some negative sentiment towards UK equities (shares) over the last period. Indeed, a recent journalist request for comment echoed this sentiment, although we were a little more positive in our outlook for the year ahead, noting that President Trump has the US election to contend in November this year (some might suggest empowered by the failed impeachment) and he will want the US economy looking buoyant. Whether he achieves this, and how it is measured, is a different matter.

2020 almost immediately opened with evolving geo-political tensions moving front and centre, along with the concerning news of the global outbreak of coronavirus. At the end of February, global markets indicated concern over the global spread of Covid-19, with many equity markets seeing falls. Having reviewed our views on the economic position during our Investment Committee in February, we believe that the medium / long term views on investment remain unchanged at this time, although as you would anticipate we will keep this under review.

These unfolding events may increase volatility over the months and years to come. We may also see volatility in other areas, such as currencies and oil prices, which may have a bearing on asset values. We continue to remain keen advocates of diversification across investment areas and assets. During the times when we have experienced investment volatility, it is important to remember that most asset related investments are made for the longer term and that movements in the market are to be expected, both now and into the future.

Investment Diversification

As a note, we are not seeing a significant shift away from UK equity investment and I think that to do so may be an overreaction. Investors in FTSE100 companies may benefit from falls in GBP Sterling, as a significant proportion of profits for FTSE100 companies are made in other currencies. In addition, as an example, investors more generally may also benefit from the end of the trade wars/tariffs between the US and China. There are no guarantees that this will happen, but (as we have noted in previous articles on our webpage) with a US election in November 2020, pressure may be on to make this occur sooner rather than later. We believe that most markets have factored in some form of Brexit effect and some might fairly note that UK equity values may have an under-valuation and offer a buying opportunity.

But what of other indices, such as the FTSE250? The FTSE 250 has greater UK focus than the FTSE100 and by its nature features smaller companies. We believe that these have greater exposure to Sterling variations and, of course, the U.K. economy and its Brexit headwinds. In principle, it is likely to be the FTSE250 which may see the greatest volatility over Brexit, dependent on the way GBP Sterling reacts. The next period of time is an unknown for us all and we do expect volatility, which may be more pronounced in the FTSE 250 market.

Chapters Financial has collated an example performance graph of some of the main investment sectors over the last 10 years as an indicator of performance of varying investment sectors over the period:

Graph Key:

  • A FTSE 100
  • B FTSE 250
  • C Sterling Corporate Bond
  • D UK Commercial Property
  • E Gilt & Fixed Interest
  • F Commodities
  • G Global Equities

(Source: Trustnet Portfolio Tools/ February 2020)

The performance graph above indicates the performance of a selection of sectors over the past 10 years, but past performance is not a guarantee of future performance

Long term strategy

Most of the investments we maintain are long term investments, using asset allocations to meet clients' attitudes to and tolerance for investment risk. We see a longer-term strategy as being over five years. It is important that clients' views on risk attitude and aptitude are reviewed regularly. There were already longer-term concerns that the long running equity bull market, which was tired, had a little left to run, and this still may be the case (not guaranteed). However, the global economic effects of Covid-19 over the course of 2020 have already focused attention on future growth indices, with a few key indicators to note a recession on the horizon. We are pleased that as financial planners, we have invariably been keen to diversify clients' investment holdings, usually containing a mix of asset classes, including shares and bonds. Some holdings, such as UK Government Bonds, have gained in value over this volatile period, and this can sometimes provide opportunities if funds are needed.

Reducing investment risk?

Noting the above, what are the alternatives to reduce investment risk, and perhaps correlation? If a move to lower risk is required or advocated, we could look at a mixture of corporate and government bonds (global and UK). Some may argue that the correlation between bonds and equities has reduced significantly in recent times. With a bull bond market now in its 36th year, some are questioning that if it can continue this long, when will it really stop?

Alternatives?

For further diversification, investment in commercial property could also work, although we have been reducing positions in this sector, particularly in the UK, of late due to concerns over potential future down-valuations or moratoriums. At the highest end of the risk scale in our opinion, we find commodities and of course gold!

But be careful, all that glitters…

There are no guarantees within this blog, and these are only our opinions. No individual advice is provided during the course of this blog. Past performance is not a guarantee of future performance.

Keith Churchouse FPFS

Director

CFP Chartered FCSI

Chartered Financial Planner

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