Our CEO Charlotte Ransom was in conversation with Jane Lewis (City Editor of The Week), David Stevenson (columnist at the FT, Citywire and MoneyWeek) and John Stepek (executive editor of MoneyWeek).
Jane – What is the new normal and do you think it will continue?
Charlotte – The global pandemic has forced us to live through extraordinary months this year. We’ve seen record lows in markets and also record speeds back to the highs. Unprecedented central bank support and monetary easing have contributed to a pretty significant level of confidence given the backdrop we have all been living with.
But, of course, we have lived through extreme times on many occasions in the past. The global pandemic between 1918 and 1920 was followed by the roaring 20s and extraordinary positive market sentiment. Much more recently, the global financial crisis in 2008 had a very exaggerated effect on financial markets but we had a decade of largely positive markets that followed that particular crisis.
What we have seen during the course of this year has been the acceleration of a number of pre-existing trends. For example, we’ve had interest rates that have been gradually moving lower and lower, despite the fact that many commentators felt this was impossible, even last year. Equity markets have had a long-term situation where growth has trumped value stocks and that became all the more evident over the course of the crisis with the astonishing dominance of technology stocks.
But some of these long-term trends, exacerbated in the pandemic, are now in the process of rotating. So back to your question, is there such a thing as normal in investing – I think the answer is yes. Dramatic events do happen, often fairly regularly. Most recently, we have had pretty noisy news with the US election and the fantastic news about the vaccine. And, one of the things we have been reminded of again over the course of these remarkable few months, is that timing the market is next to impossible.
The more important thing is to be invested and to be able to take advantage of some of these dramatic market moves, which would be impossible to know were coming. Rather than trying to second guess the market, we should try to benefit from those movements as and when they happen. And what we tend to find over the very long term is that no matter how much the markets throw at us, the impact in the long term is not detrimental to overall portfolio returns.
Jane – What impact do you think the pandemic will have on overall long-term macro trends?
David – I agree with what Charlotte said. We are seeing a reinforcement of some existing trends. The two things I would probably highlight are, one, government. The story of the last 10 years has been one of extraordinary monetary innovation. Governments have been a little on the backfoot, I would suggest, about what to do about some of the economic challenges – they’ve left it to central bankers to deal with. And I think that what has changed now is that the governments are doing stuff, the fiscal deficits you mentioned already are a sign we’re seeing much more fiscal intervention – but why does that matter to investors?
It matters to investors because you start to build up levels of debt, which introduces worries about whether that debt is unsustainable and you worry about inflation. So I think what the pandemic has definitely done is that it has accelerated a move towards fiscal expansion – of course, it all has to be paid for at some point. So that’s one point, and there is a bundle of things in there which investors should care about – tax and inflation and interest rates – but they are an acceleration of existing trends.
The other thing which I would just simply identify is the importance of technology, as a sector and as a source of growth. We already knew it was important and that has simply been accelerated, the tech trends have been reinforced. But what I would also suggest, as a kind of leftfield suggestion, is that our focus on the big tech giants reminds us of the importance of the biotech sector, the life sciences sector. It’s a kind of rude awakening that the pharma companies and the biotech companies are really very important and I think we are going to see a reassessment of people’s exposures to those sectors.
Jane – I think one of the great things about the covid vaccines is that it offers a lot of hope, say, for future cancer vaccines – investors have pumped billions into pharma and we’ve seen the results, or we hope to soon anyway. On the other hand, if we do get a massive bounce back next year, if the vaccine works, are we then in danger of flipping that deflation worry to a galloping inflation worry if growth takes off?
David – I think you’ve got to keep a sense of balance. The breakeven rate – which tells us what fixed income investors think is the likely outcome for inflation – is currently suggesting the exact opposite which is deflation. Many of the drivers that were true for the last 10 years are still in place. We’re still buying stuff from China. Technology is still having a big impact. Labour markets have not been re-regulated.
Therefore, in reality, the signals of inflation are very weak, but an important caveat: I would suggest investors don’t get fixated on the RPI rate, or the CPI rate – what you should really look at is what people’s expectations are and if the actual outcome from those inflation rates is above expectations. The market can get its head around slowly increasing inflation if it does happen, but what it doesn’t like are shocks and surprises. If inflation suddenly shot up in a capacity crunch post covid, to 5% or 6%, and the market didn’t expect it, that could be a shock to the system.
Charlotte – Just to add to that because we have been talking about the very significant debt levels and the potential problem that leaves everyone with. Actually, if we can have inflation tick up a bit and, as David said, not to the point that it is at shock levels, but at higher levels than the market is currently predicting, growth is of course what will allow us to be able to pay down the debt, so we need some inflation. There is a reasonable margin for inflation to expand, so I think overall this is a very positive picture because the vaccine is going to allow economies to start to drive towards a more typical level of growth.
Jane – From the point of view of my portfolio one of the places where it is affected the most is income, with dividends slashed here and there and everywhere. Is that going to change do you think?
John – Dividends have been absolutely hammered this year, down about 25% on last year, certainly in the FTSE 100, which is not surprising when you shut down the entire economy. Companies need to conserve cash, and also because it doesn’t look good – Sainsburys restored its dividend at the same time it made a load of people redundant. It’s not politically okay at the end of the day. That’s why the banks aren’t allowed to pay dividends – it’s not because they can’t, but because politically speaking it just doesn’t look good.
Jane – There is an argument they need to hold on to their dry powder as much as possible, certainly at the start of the pandemic.
John – Absolutely, I also think the banks still have that hangover from 2008 where people are still quite annoyed they were bailed out then. While dividends are really important, on the one hand I would say that it’s only going to recover from here, with companies reinstating their dividends, and if a vaccine comes through they might do so even faster if we get a quicker recovery than we expect. The other thing I would say is to not obsess about dividends too much. It’s very easy to get overly focused on income but obviously what matters for your overall portfolio is total return.
Charlotte mentioned how value has been struggling against growth, for pretty much an unprecedented length of time now – and value stocks often tend to be dividend stocks as well. That might turn around, we have been hoping and expecting it to turn around for a while, but the point is you shouldn’t be betting on one outcome or relying on your return from one source. So as I said it is total return that matters and ultimately that’s why we diversify our portfolios. You can’t rely on one strategy working all the time.
Jane – Exactly, it seems extraordinary that value stocks have been on the back foot for so long.
John – It shows you how long it takes for things to recover from busts. I think it’s really fascinating if you look at the dotcom bubble and you look at what happened between 2000 and 2010. Just after the financial crisis is when the tech stocks started to recover, at the same time that the financials and the banks were getting hammered. We replaced a tech bubble with a financial and a credit bubble. So giving 10 years for the banks to be in the doldrums is not that surprising when you look at how long it took for Amazon and the other dotcoms that survived to make a comeback. That’s why you can’t have all your eggs in one basket because you just don’t know when that one basket is going to be upturned.
Jane – Yes, what I want to ask Charlotte is whether the eggs in the basket scenario has changed since March? What have you learned about asset allocation and how have you been advising clients?
Charlotte – Certainly the way we think about investing has always been on a diversified basis. We run portfolios that are globally diversified as well as keeping a mix of equities and fixed income – and within fixed income thinking about different levels of risk within that sector from government bonds and high yield bonds up to emerging market bonds. What we have learned again is how important asset allocation and being diversified is. As John said, it can prove to be very costly to put all your eggs into one basket no matter how strongly you feel about a particular stock or a particular sector.
Quite often with clients of ours they will have their core assets in a fully globally diversified portfolio. They will also have other investments – what I would call satellite investments which are complementary to their central holding – where they are prepared to put a certain amount of money into areas they feel strongly about. That could be technology stocks for example – ever since the original lockdown I was kicking myself for not having bought Ocado stocks because that was the only way I was able to get food to where we were hunkered down!
But it’s really interesting to think about this question of diversification because during the pandemic, as we know, the UK market suffered and then regrouped, overall the UK market has suffered in particular compared to other markets. However, the reason the US market has seemed so strong is down to those 4 or 5 technology stocks. Broadly speaking, 495 stocks of the S&P 500 have not done particularly well – it was really driven by technology.
And then, of course, Asia went into the crisis and came out of the crisis sooner than Europe and North America, and again we started to see the pull of growth factors there helping their markets. Now what is interesting is if you compare the size of the UK economy at the end of 2019 versus now, it is about 10% smaller. Whereas our developed market peers, whether in North America or Europe, are down in the range of 3-5%. So we have been more affected by the pandemic, but with generally very positive markets recently and the fantastic news about vaccines, what we’ve seen is that the UK has outperformed other markets. Even in the last month the UK is up 5% vs global equities up just under 2%.
This is why diversification is so relevant.
Jane – Where else at the moment are you interested in, if you could pick out a region say in Asia? How about Japan for example, how is that looking at the moment?
Charlotte – We don’t pick stocks, and we also have balanced portfolios, but we do rotate obviously around those regions. Our chief economic strategist, Gerard Lyons, has a very strong view on Asian markets and has done for a long time. He believes that in the long term they will be the biggest drivers of returns and so we are positioned in those markets, and China inevitably is an important part of that.
Interestingly, you mentioned Japan and one of the things I would say is that when it comes to asset allocation there are also traditional tools that shouldn’t be forgotten and act as quite interesting hedges for when bad stuff happens. The yen is one of those currencies that tends to do well in a crisis and for a part of the crisis this year that was also true. Fixed income, too, no matter where interest rates are, plays a very important part for when things go wrong. Now we’re probably at a point where we believe interest rates have a reason to creep slowly back up, so bonds are no longer likely to be as useful a tool as they have been. Yet they have been a very important part of any diversified portfolio over the last few years, and, in particular, the last few months.
So it really is a question of staying on top of these macro changes and at the same time recognising that these are long-term views we are implementing rather than trying to take any sort of tactical positions.
Jane – I am quite interested in, as well, the impact the pandemic has had on investment psyches, that sort of classic investment spectrum between greed and fear. Where do you think people have been on that, David, and where have you been on it yourself?
David – There is a website in America called Robin Hood, which is like a free share-dealing site, and you find a lot of people busily speculating like crazy. The truth of the matter is that we investment professionals are often a bit sniffy about this kind of stuff, that we the experts know better, but quite a lot of these people realised early on that this tech shift was happening and they were ahead of the curve.
Although they did do daft things – like buy Hertz, which had gone bust – there is a kind of inner logic to it. If you’re a millennial the government is not going to rescue you when you retire – pensions won’t be that much at all. So the fact that they are taking an interest in their investments, and they realise they have to do it themselves effectively and not rely on the government, is no bad thing. But if you are in your mid 20s and invest your money and lose it all very quickly, by investing in some daft stocks, it can burn you. What you don’t want to do is make a loss in your 20s then pack it in and say that’s it, and stay in cash the rest of your life.
Jane – Yes, that’s a disastrous course of action, so what sort of advice would you give to your own children?
David – My 19-year-old son has been buying individual stocks. I tried to talk him out of that and urge him to buy funds or ETFs or investment trusts – I’m not a fan of picking stocks. The advice I sort of give is, if you’re willing to be patient and you’re willing to just keep putting money away for the next 20-30 years, learn from your mistakes, and try to not make too many mistakes in the first place.
Be patient and accept there will be times, like we’ve had, where there will be a bloodbath and you could be down 40-50%. That happens with great regularity, you’ve got to see through this volatility and realise what the big game plan is. Charlotte mentioned diversification, and inflation, the big structural changes like China and Asia. You need to tune your portfolio to understand these really big, multi-decade structural drivers.
Charlotte – Can I just add something, just thinking about younger investors, because it is something I feel very strongly about. There is an awful lot of data pointing to younger people living through a crisis that potentially puts them off investing for a long time which is incredibly detrimental to their long-term financial outcomes.
Various companies have popped up and let people speculate in single stocks, and as David said, that may not be for everybody, but it’s an interesting way to learn. Yet for the vast majority of young people it isn’t something they will want to engage with. One of the things we found is that having decent technology is a great way to be able to demonstrate to people about the power of long-term investing, without making it too staid, so they can visualise what’s going on.
I know this sounds like a terrible plug for Netwealth, but we are the only people who have a service like the Netwealth Network, which is where a client can introduce up to seven members into their network – 70% of our clients are in networks. Very often it is people our age who introduce younger people into their networks. And what I really like about that is that it’s helping those young adults (a) to be able to invest at a very low cost, and when you invest over a long time, cost has the biggest impact of everything in terms of returns, and (b) because the technology is so nice it’s proving to be more interesting for younger people than some of the alternatives on offer.
So I am just mentioning this because it can play a very important part for families when they think about their general financial wellness across the family unit.
Jane – Yes, I like the idea of this network, and on the subject of the young, in terms of a redistribution question, is the pandemic going to help them at all, say re house prices? What’s going to happen when all the support is removed next year?
John – In terms of what it means for the younger generation, a redistribution, I think that’s more to do with politics and I think that what is clear is that gradually the window has moved leftward, certainly in a more redistributive way. You have a massively interventionist conservative government now – interventionist in the way a right-wing government would never have been thought likely 20 years ago. I think one of the big risks for people with wealth is big changes to taxation and attitudes towards tax. So that is something that I think older investors will have to think about going forward.
Jane – Charlotte, how would you safeguard your portfolio, or can you even, against knowing there are tax hikes coming down the line? How would you advise clients to prepare for that?
Charlotte – I feel that tax is one of those things which people spend much too much time trying to think about how not to pay, rather than focusing on the things that will allow them to get a really good return and then pay the tax that’s due. The one other thing I would say on tax is that I believe it is more political than about raising money. You would have to do something quite extraordinary to plug the gap – tax alone cannot make up for the amount of borrowing that we’ve had. Therefore, it is largely going to be down to the way the political wind is blowing.
As a rule, we will all have time to plan, in the knowledge that a change is coming and I think that’s an important thing to remember. There’s no point in panicking or spending too much time wondering what might come down the pipe, but recognise that there will likely be a chance to plan as and when it does happen. I think something is likely to come and it could be a variation of what is really a wealth tax that will most likely be implemented.
Jane – Yes, what do you think John?
John – That’s a really good point that Charlotte’s made, about having time to plan these things. And it’s one of the benefits ultimately of living in a country like Britain. There’s a sense your property rights are secure, they’re not going to spring something Monday morning that says “we’re going to backdate this new wealth tax, or seize your pension.”
The one thing I would say is you should try and make use of the tax-efficient vehicles which are out there. And you shouldn’t just use one, because despite what I just said about pensions, they do change the rules on those practically every year. Whereas ISAs, for example, at least you can get your money out fast if there is an issue. So I wouldn’t rely on any one tax-efficient vehicle for putting all your savings into. Do what you can, but don’t panic about it.
Jane – Sound advice. Charlotte, where are you on individual assets like gold at the moment?
Charlotte – We don’t currently hold gold in the portfolios. I talked earlier about the fact that we look at a range of defensive assets. Gold is of course traditionally one of those defensive assets and has done very well during the crisis, although uncharacteristically it started to trade like a risk asset more recently.
One thing I would like to talk about concerning the topic of debate today is the ‘new normal’ and how the pandemic has affected people thinking about their goals.
It’s been really interesting for me to see how people have – maybe for the first time in some cases – over the course of this year, started to think more carefully about their financial plans. All of this volatility and discussion and commentary, with all of these extraordinary events, has made people recognise that it’s really important for them to get their heads around whether or not they have a plan in place and whether it is in line with what it needs to do.
The key is that the things we all live with like divorce, retirement, legacy and education – these topics are just as important as they have ever been. It doesn’t really matter in a sense what the market throws at us because these issues are still going to need to be managed. And if there is a takeaway from this discussion, hopefully people are reminded that regardless of what’s going on outside of their control, there are certain things that are within our control, that we need to try and manage.
We talked about the spectrum of fear and greed, and where financial consumers sit on that spectrum. For most of us, once we can see that our plans are still intact – that is, the longer term transparency we have about when we retire or what we might need to live on or how we are going to support elderly parents – even though we may be living through volatile times, I believe that within that spectrum you can sit really neatly in the middle.
You don’t have to be greedy because you’ve planned your assets out in a way which means you should be able to meet whatever your needs are. So forget about beating a benchmark, it’s a question about what you need that money to do for you. Nor do you need to have fear, because you have transparency around the fact that no matter if markets sell off at some point, then it’s probable that over time they’ll regroup again and your goals will be met.
It’s really important for people to bear that in mind because it’s very easy with the levels of headlines we have been getting to be thrown off course, and be concerned that all of these things we have been trying to get done are now doomed. Very often that’s not the case.
Jane – I think that is a very good takeaway to have at the end of the conversation. Thanks so much to you all. It has been really illuminating.
Please note, the value of your investments can go down as well as up.
