An Investment Update / June 2020

Most investment markets have of course been highly volatile over 2020 as we have entered unprecedented times created by the real unknowns of the Covid-19 pandemic. Many economic factors have been under review; as an example, the Bank of England has reduced bank base rates twice, now standing at 0.1%, the lowest level ever.

With regards to market indices, and as an example, the FTSE 100 stood at 7436 points at 20 February 2020, fell to 4993 as at 23 March, a fall of approximately 32%, and has now recovered some notable ground to 6340 points at the close on 04 June 2020.

Volatility is not just restricted to equities, noting as a further example that Brent Crude oil prices dropped from around $68 a barrel at the very end of 2019 to $16.90 a barrel at its low point by 22 April 2020. Although a recovery seemed to begin fairly quickly, with the price reaching just under $39 a barrel by the beginning of June), the price of WTI (West Texas Intermediate) Crude oil fell to around -$40 on 20 April, but then recovered, with Brent Crude trading at approximately $40.11 on 05 June 2020.

Sterling weakened against the dollar over the initial pandemic period, with the (GBP) pound buying 1.29 US dollars on 25 February 2020, then falling to just under 1.15 US dollars on 20 March 2020, and now recovering to approximately 1.26 US dollars at 05 June 2020. Don't forget that we have two events that may affect this exchange position in the latter part of 2020, namely the US elections in November 2020 and the continuing and somewhat volatile Brexit trade negotiations.

It is difficult to make comparisons to the current global position, however, there are some grounds for referral to the past to inform the current situation.

The team at Chapters Financial maintains an Investment Committee to review investment allocations and our investment 'house view' on a regular basis. Our virtual meeting in May 2020 was helpful in considering client portfolios, pensions and ISA positions, to maintain our advice service to our clients.

To maintain a healthy critique of our house view, we have for over a decade employed the services of Steve Williams, Director of Cormorant Capital Strategies, to provide additional experience and an external view of our ongoing asset allocation models and positions for clients. He has provided us with a helpful and forthright update for the beginning of June 2020, noting that past performance is not guaranteed, and that fund values can fall as well as rise, as we have certainly seen over the last few months.

The detailed update is below:

April and May 2020 were bad. June will be better. July and August 2020 will be good. That's my forecast for the virus, the policy response to the virus (the lockdown) and for economic activity.

It's not a place I occupy with regularity, but I find myself on the optimistic flank of the investment management herd. A great many of my fellow grazers are concerned that the lockdowns will stay in place for longer – spurred by a second wave of infections – and that ultra-low levels of economic activity will persist for longer too. They worry that things will not return to 'normal' for a very long time and that the post-March increase in equity prices is precipitated by a false hope.

I think the majority are wrong, though some are more wrong than others of course. Those that make particularly egregious errors of judgment are drawn to comparisons with the Spanish Flu or with the Great Depression.

I'll leave the pathological comparisons between the Spanish Flu and Covid-19 to others better qualified but I think those that believe the comparison to be a valid one have a lot of work to do to substantiate those claims.

Those drawing on the Great Depression for their model are fooled by the numbers. It's true, if we squint our eyes, the dramatic declines in economic output, falls in stock prices and huge run up in the unemployment count do look a little like those associated with the Great Depression. But that is where the comparison ends.

The Great Depression in the 1930s and the Great Recession in 2008 have their similarities. They were both precipitated by failing financial markets. Failed financial markets don't just see large declines in asset prices, the real damage is the sustained impediment in the flow of credit with banking crises being one of the more visible aspects. Aside from the immediate economic impact, dysfunctional financial systems are a serious impediment to recovery. The Great Depression was almost inescapable for that reason and policy mistakes encouraged setback after setback.

The 2008 Great Recession was associated with far fewer policy errors but still, a failed financial system saw the British economy shrink by 6.0 percent over the course of 15 months and it took another 60 months, or 5 years, to recover the lost output.
It looks likely that we will lose in the region of 8.0 or 9.0 percent of output this year. Even more stunning is that almost all of that loss will likely come in just three months. Estimates vary greatly but I'm guessing that the April to June period (Q2) will see output fall by 16.0 to 18.0 percent. To pile guesses on top of guesses, I'm guessing that Q3 brings about an increase of 9.0 to 11.0 percent and that is followed by further gains in Q4 to cut the total loss back to the 8.0 or 9.0 percent range I mentioned earlier.
As big as those numbers are, though, what nourishes my optimism an awareness that the financial system has weathered this storm. Markets have remained functional throughout; largely owed to a competent policy response from both the Bank of England and HM Treasury at home and other central banks abroad. That being the case, we have all that we need in place for a vigorous recovery as and when the time is right.

And in that regard, my position is not so different from those in the herd forming the centre ground. I expect it will take not much more, if indeed it is more, than two years for us to recover to pre-pandemic levels of output. As far as I can tell, those in the centre ground are beginning to gather somewhere between there and the 3 year mark.

My beef is not with them. It is with those that think what we are facing today is as damaging as the with the Great Depression. It is not.

Steve Williams
Cormorant Capital Strategies

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?


For further diversification, investment in commercial property could also work, although we have been reducing positions in this sector, and with many commercial property funds now temporarily locked under moratorium, we are pleased we took this view over the last year or so. At the highest end of the risk scale in our opinion, we find commodities and of course gold! (Risen approximately 15-16% over the last 6 months/ not a guarantee of future performance).

But be careful, all that glitters is not gold, and in these significant times, for many there are more important things to be concerned with. As the UK along with many global producing nations return to phased and then full working, this summer will be very interesting as economies re-emerge, noting of course that the risks that the virus bring have not gone away.

Please stay safe all!

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


CFP Chartered FCSI

Chartered Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899