Plotting a course through the Brexit fog

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Shaun Wood | 21st December

Plotting a course through the Brexit fog

2018 in review, what COULD we expect for 2019 and our thoughts on what you should be doing

As one of four practicing financial advisers within Simpson Wood, questions and queries regarding clients’ portfolios, equity market movements or likely returns etc are to be expected.  However, as the chair of our investment committee and the term ‘Brexit’ on the tip everybody’s tongue, I seem to have done nothing but answer questions on the topic, and its effects on investment markets since September.

The purpose of this blog is to provide you with an insight into what our investment committee go through each quarter, but mainly give you some insight into what happened this year, why, and how we see things for 2019 and most importantly what you should and should not be doing right now.  

2018 in a nutshell, was very much the return of market volatility.  Unlike the unusual but systematic rising markets of the previous six years, 2018 had both ups and downs, with no fewer than nine movements into both positive and negative territory for the year.

A picture is worth a 1000 words….. Below is a chart showing the 2018 performance of US, UK, European and Japanese stock markets. 

Why is this?  What changed?  Contrary to popular belief the catalyst for the volatility was not Brexit, a global recession looming ahead, or even President Trump’s twitter feed, it was actually triggered by the US Federal Reserve deeming their economy (which global equity markets generally follow) was strong enough to sustain another interest rate hike, but more importantly as Chairman Powell states “An autopilot of rate hikes ahead!” https://tradingeconomics.com/united-states/interest-rate

The FED did as promised and continued with the rate rises at practically all rate review meetings in 2018, even most recently when President Trump did everything but warn them not to.  The rate hikes, but more so the ‘autopilot’ policy of rate rises to continue into the future, are a sign of a strong economy, but did knock investor sentiment, which in turn causes equities to experience sell-off periods for two main reasons.  Firstly, investors worry that without low interest rates, can the economy carry on to grow?  But rising interest rates also have the obvious knock-on effect of rising yields in lesser risk sectors, such as cash and short term treasury bonds.

 

Politics

As mentioned above, most of my conversations start with people worrying about Brexit and what will happen in March 2019, or possibly the outcome of President Trump’s trade negotiations with China.  Now even though these issues did not cause the market volatility in early 2018, each power-declaring tweet of President Trump or uninspiring stance on Brexit caused more uncertainty and knocked investor sentiment further.  At the end of the day, equity markets are essentially a combination of investor sentiment and economic fundamentals. When both are strong, markets will rally and keep on rallying.  Equally when both are not, then markets will fall in the same dramatic fashion.

However what we have experienced in 2018, and are experiencing now is neither of these, as sentiment is being hit from numerous sides, but economic fundamentals remain strong, as do forecasts for 2019.

The net effect of such a situation is known as market volatility, as fundamentals, and the investors that believe in the fundamentals will be pushing markets higher, only to be pushed back down when uncertainty kicks in again.  The term ‘uncertainty’ has never been more prevalent than with Brexit.  Whether you listen to mainstream media, remainer-led news or hard-line Brexiteers, none of them know the outcome. Although not helpful, uncertainty does not mean negativity nor does it guarantee that the UK will thrive or fall into recession post-Brexit.

 

Thoughts from Simpson Wood Financial Services for 2019 and Beyond

One of the main differences between Simpson Wood and many of our peers in the financial services industry, is our quarterly investment committee.  Whilst others may have one or outsource the whole investment decision process, we run our own committee made up of all personnel qualified to advise, but also includes an external investment analyst.

It is the use of this analyst and the data provided each quarter that drives our investment decision making.  One of the key terms used each quarter of 2018 was “when you look past the noise”, which was usually followed by “the fundamentals look strong”.

In other words if the Brexit fog is lifted, uncertainty between the US and China is resolved, and as the equity markets are solely based on companies’ earnings estimates for the year ahead, they should be higher than they currently are.  Obviously the world is not that straight forward, but our job is to try and position portfolios to weather the short-term volatility whilst maximising long term growth.

 

How does this impact on you and your investment/pension portfolios?

That depends upon how often you check your portfolio.  Short-term volatility means that you could experience a 5-7% swing either way in a week, so if you check regularly you may see your portfolio rise and fall.  However if you (and your adviser) are happy with your investment allocation, because your investments are for the long term, you should acknowledge the volatility for what it is and look long term.

 

What should you not be doing?

Quite often the client conversations regarding Brexit, other uncertainties in the world or market volatility start along the tone of “should I be looking to sell and pull out?”.  To which my response is: “Do you need the money now?”.  Is this money no longer earmarked for retirement?”

If the money is invested for the long term, why would you look to sell up and pull out when it is down?  If you owned a buy-to-let property worth £200,000 last March and somebody offered you £180,000 for it now, would you suddenly sell up?  Investment portfolios are no different, they are for the long term and short term volatility is unfortunately part and parcel of how long term gains are made. So although it is a common and natural urge to protect your portfolio in a downturn, if it is long term money then it is unlikely to be logical.

 

What should you be doing?

  1. Make sure you are in touch with your adviser, and have reviewed your allocation recently in accordance with your expected withdrawals and overall objectives.
  2. If withdrawals are expected in the next two years, make sure your adviser knows about this intention.  It may well be that the right advice is not to be invested through this volatile period, or funds are highlighted and earmarked for withdrawal.
  3. If you do not work with an adviser: you either look after your own portfolio, or you are in a workplace type pension arrangement (which automatically dis-invests your portfolio as you approach retirement), it would be wise to seek advice and review your portfolio.
  4. If you have cash that is surplus to requirements, it would be prudent to discuss an investment strategy with your adviser.  The amount, and your objectives, would dictate whether the investment is better suited being phased into the portfolio, or invested in one lump sum.  One of the perks of market volatility, is the ability to get cash into your portfolio when markets are low.

 

In times like these, I advise clients to think and act with a clear mind.  Do not try and ignore the noise and the Brexit turmoil ahead, as it will be impossible, but factor it in rationally, discuss with your adviser, and make sure your plan is set for the 6 months, 18 months, 3 and 5 years ahead.

As Warran Buffet says…. “When everybody is selling, you should be buying and when everybody is buying, you should be selling!”

I hope all that read this find it helpful.  Should anybody have any queries regarding this blog, or wish to ask any queries regarding our services or investment proposition, then please do not hesitate to ask.