The World In A Week - Beware Greeks Bearing Letters

Written by Cormac Nevin.

Last week markets had a placid start, until Friday, when fears about the discovery of what was dubbed the “Omicron variant” of COVID-19 descended upon markets like a flock of thanksgiving turkeys.  The MSCI All Country World Index of global equities dropped -2.4% in GBP terms on Friday, to end the week down -1.9%.  Global Bonds, as measured by the Blomberg Global Aggregate Index, were up +0.1% GBP Hedged.

Omicron is the 15th letter of the Greek alphabet and, in a delicious irony, the sharp market selloff on Friday was exacerbated by the third letter of the Greek alphabet; Gamma. This is used to describe the phenomenon resulting from the widespread use of options to make highly leveraged bets on single stock names, particularly by retail traders on platforms like Robinhood.  This causes a feedback loop whereby selling begets more selling by dealers and can result in sharp plunges like that which we have witnessed. The US Equity market is currently dominated by this activity, which explains much of the parabolic upside moves in names like Tesla and gives us slight cause for concern about having too much exposure to US Equities.

Events such as last Friday reinforce our conviction in our neutral equity positioning and diversified approach.  MSCI Japan was down only -0.2% on Friday, as European and US markets sank – illustrating the opportunities various markets provide.  While it is likely too early to say for sure, the Omicron selloff appears to be reversing.  Countries are much better equipped to deal with new variants of COVID-19 than they were in the first wave, illustrated by the UK’s quick closure of travel from Southern Africa.  In addition, companies like Moderna are already using their mRNA technology to synthesise Omicron-specific vaccines.

Given stretched valuations and the implicit leverage in certain markets, we think events like Friday may become more frequent.  It will also likely be even more challenging for markets once central banks stop providing liquidity to an arguably overheating economy.  A flexible and diversified approach will remain critical.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 29th November 2021.
© 2021 YOU Asset Management. All rights reserved.


The World In A Week - Will Markets Catch A Cold?

Cases of the Covid-19, otherwise known as the Coronavirus, spiked last week, although we note that this is due to the inclusion of reclassified cases. On a positive note, laboratory confirmed cases were lower, which suggests that the disease is spreading at a slower rate, although the death toll has now exceeded that of SARS. The economic impact of the virus has been mixed thus far, but we believe it will have long-reaching, knock-on effects to the greater Asian region. It is thought that the People's Bank of China (PBoC) are likely to provide liquidity, to ease funding conditions in Chinese money markets in an effort to tackle downside risk posed by the virus and that further measures to support the economy could follow.

Leading into a long weekend for US citizens, who will be celebrating President's Day, US economic data remained robust. Labour market indicators, especially workers who are quitting for new jobs and small business optimism, were particularly positive. January retail sales rose inl ine with expectations of 0.3%, this was mostly driven by online and other non-store sales. Earnings also continue to be strong; of 80% of S&P 500 companies that reported in December 2019, 76% beat earnings expectations, which is in line with the long-term trend, suggesting the economy is in rude health.

In the UK, the 'Boris Effect' continues to be felt; Chancellor Sajid Javid resigned from the Cabinet following Boris' request to sack all of his advisors, a request that Javid felt was a move too far. It has been widely publicised that there have been tensions between Javid, and Boris's top adviser, Cummings, who wanted more control over economic policy and spending in the last few months. Javid's departure made way for the appointment of Rishi Sunak who has a tall task ahead; with the Budget due to take place on 11th March, it is questionable if this will go ahead.


The World In A Week - Policy Preferences

Last week saw a reversal of fortune regarding market performance as global equities shrugged off concerns with MSCI AWCI rising +4.6% in GBP terms. This was primarily driven by the Chinese and US stock markets (up +6.5% and +5.1% respectively) and rests on the assumption that the Coronavirus outbreak can be contained. A secondary-order assumption stemming from the Coronavirus outbreak is that any economic slowdown will be countered with easier monetary policy from the world's central banks, namely the People's Bank of China and the Federal Reserve in the US.

This reversal in sentiment was also observed in the fixed income markets; high yield bonds rallied +0.60% while high quality bonds lost -0.12% - both in GBP hedged terms.

While the assumption that central banks will provide ever-increasing degrees of monetary stimulus to calm nervous markets has worked well as an investment strategy since the financial crisis, signs are appearing that this relationship could come to an end. Negative interest rates are being used in an attempt to stimulate growth in the Eurozone, Japan, Denmark, Switzerland and Hungary. Thus far the success of this experiment has left much to be desired, and the efficacy of negative rates is now being called into question by many. In December 2019, the Swedish central bank, the Riksbank, decided to abandon the negative interest rate experiment and raised rates to 0%.

The ineffectiveness of monetary policy to bolster further economic growth has led many market participants advocating a pivot to fiscal policy to pick up the slack. Governments in the UK and Europe seem to be gradually moving to take advantage of low interest rates for infrastructure spending. In addition, left wing economic policy is coming more into fashion around the globe, Bernie Sanders is leading the polls in the democratic primaries and over the weekend the Irish electorate returned Sinn Fein as the largest party in a general election. We continue closely to monitor policy makers preferences for economic stimulus and how markets will react.


The World In A Week - Policy Preferences

Last week saw a reversal of fortune regarding market performance as global equities shrugged off concerns with MSCI AWCI rising +4.6% in GBP terms. This was primarily driven by the Chinese and US stock markets (up +6.5% and +5.1% respectively) and rests on the assumption that the Coronavirus outbreak can be contained. A secondary-order assumption stemming from the Coronavirus outbreak is that any economic slowdown will be countered with easier monetary policy from the world's central banks, namely the People's Bank of China and the Federal Reserve in the US.

This reversal in sentiment was also observed in the fixed income markets; high yield bonds rallied +0.60% while high quality bonds lost -0.12% - both in GBP hedged terms.

While the assumption that central banks will provide ever-increasing degrees of monetary stimulus to calm nervous markets has worked well as an investment strategy since the financial crisis, signs are appearing that this relationship could come to an end. Negative interest rates are being used in an attempt to stimulate growth in the Eurozone, Japan, Denmark, Switzerland and Hungary. Thus far the success of this experiment has left much to be desired, and the efficacy of negative rates is now being called into question by many. In December 2019, the Swedish central bank, the Riksbank, decided to abandon the negative interest rate experiment and raised rates to 0%.

The ineffectiveness of monetary policy to bolster further economic growth has led many market participants advocating a pivot to fiscal policy to pick up the slack. Governments in the UK and Europe seem to be gradually moving to take advantage of low interest rates for infrastructure spending. In addition, left wing economic policy is coming more into fashion around the globe, Bernie Sanders is leading the polls in the democratic primaries and over the weekend the Irish electorate returned Sinn Fein as the largest party in a general election. We continue closely to monitor policy makers preferences for economic stimulus and how markets will react.


The World In A Week

The World In A Week - Love Changes Everything?

Today we could have written about the United Kingdom no longer being part of the European Union, as Friday saw us exit, but without any clarity around the trade relationship for the future. This is the start of the long journey towards clarity around how we will interact with Europe going forward.

We could have written about Mark Carney's last Monetary Policy Committee as governor of the Bank of England. The expectation for an interest rate cut had surged during January, however the committee voted 7:2 to keep UK interest rates at 0.75%. Mr. Carney officially stands down on 15th March after extending his governorship twice in order to see the UK leave the EU in an orderly manner.

What we are writing about is the Coronavirus and the concerns that this raises with short-term sentiment in the financial markets. Fear is the biggest economic threat and fear spreads more quickly when carried on the wings of social media; Google searches for 'Coronavirus' have risen sharply over the past week. It seems fear changes everything.

Fear changes consumers' economic behaviour and in turn changes policy makers' responses. In response to help contain the spread of the virus, China extended the Lunar New Year holiday to three days, with financial markets opening today. This has knock on effects for global supply chains and even a short disruption to global manufacturing should not be ignored. Companies should have enough inventory, but if Chinese companies are closed long enough, European and US production may suffer a lack of parts. We would expect sentiment surveys to worsen on the back of this.

The World Health Organisation has now declared the Coronavirus outbreak a Public Health Emergency of International Concern. We believe that international measures to stop the spread of the virus will ultimately prove effective and there are early signs that the rate of increase in the number of new cases is slowing. It would appear the world was much more prepared for this type of outbreak than it was in 2003, with the Chinese government being pre-emptive and transparent, especially in quarantining major cities.

As we wrote last week, action will be compared to the SARS outbreak in 2003 and the blueprint is this current crisis could last between three and six months. We must keep in mind that this period of apprehension will eventually end, but in the meantime, we will probably face more bad news as media sources continue to use more emotive headlines, which will likely impact markets in the short-term.


The World In A Week

The World In A Week - The Year Of The Rat

An eventful week that saw the continued spread of the Coronavirus in China, the opening arguments of Trump's impeachment trial and the 51st World Economic Forum in Davos.

The World Health Organisation have called for emergency action in China following 830 confirmed cases with 41 deaths reported so far. The Chinese city of Wuhan, home to some 11 million people has been inundated with new patients seeking treatment. A completely new hospital is set to be completed in the next 6 days and will house 1000 beds. This follows similar action taken in 2003 following the SARS virus outbreak. The timing is far from ideal as China celebrated its New Year on the 25th January and is in a period of stagnated growth. Economic activity is expected to drop significantly with reduced worker mobility and spending power, following the travel ban that encompasses 12 cities, affecting 35 million people. There has been a large-scale demand for surgical masks and gloves with more than 80 million masks sold. China's Tencent has also cancelled the firm's annual bonus release which gives employees the chance to meet chief executive Ma Huateng amid enhanced virus concerns.

The most recent chapter in the impeachment trial sees President Trump's legal team present their case against his removal from power. The session was very brief with the main statements set for this upcoming week. However, it was clear that further evidence is needed to support any case for the removal of Trump, and this would certainly undermine the US political vote as the presidential election race gathers speed. Two-thirds vote of the Senate are required to remove the President from office, an event that has never happened in US Politics.

Climate crisis was once again the topic of discussion at the World Economic Forum in the ski resort of Davos, Switzerland. President Trump's comments again sparked debate as he compared Tesla CEO, Elon Musk, to the great Thomas Edison. This follows the significant up-surge of Tesla shares which have increased by just over $300 in the last 3 months. Trump was also quick to boast his role in accelerating economic growth, with unemployment at its lowest rate for 50 years. Most notably, Greta Thunberg echoed her climate crisis call by encouraging global leaders to act immediately, further emphasised by US Vice President Al Gore, who compared the global crisis to the 9/11 event.


The Value Of Financial Advice: How It Helps Wealth Grow

Measuring the impact of financial advice can be difficult. However, research and our own experience highlight that it can have a positive impact.

The value of financial advice is something we talk about a lot at Beaufort Financial. We see the benefits it brings clients on a regular basis, whether that's the confidence to forge ahead with retirement plans or understand what they'll leave behind for loved ones.

However, measuring the impact into ways our clients can easily grasp can be complex.

After all, whilst we might help their wealth grow or minimise tax, it's difficult to show what impact this has over the long term. In some cases, clients may even wonder if they'd have achieved the same results without the use of a financial planner.

Measuring The Financial Gains Of Advice

Research from the International Longevity Centre has highlighted how taking financial advice can help wealth grow at a faster pace.

The latest report - What it's worth: Revisiting the value of financial advice - looked at the value of taking financial advice on overall financial outcomes over an extended period of time.

The research found that individuals that received financial advice between 2001 and 2006 benefitted from a total boost to pensions and financial assets of £47,706 in 2016/16 on average. This was split into:

  • £30,991 in pension wealth
  • £16,715 in financial assets

Interestingly, the research highlights the difference among those that did receive advice.

Those defined as 'just getting by' actually have a greater potential to benefit than those considered 'affluent'. The former saw a 24% boost in pension wealth compared to the 11% increase among those termed 'affluent'. Those that are 'affluent' are more likely to seek advice, but the report highlights it can be beneficial to those that would typically take a DIY approach. In contrast, 'affluent' individuals were more likely to benefit from growth in financial assets, though the gap was smaller.

Commenting on the findings, Steve Webb, Director of Policy at Royal London, said: Many of those who receive financial advice can testify to its value, but it has always been difficult to quantify. The research uses the latest statistical methods to identify a pre 'advice effect' and it is strikingly large. If financial advice can add £40,000 to your wealth over a decade compared with not taking advice, it is incumbent on government, regulatory, providers and the advice profession to work together to make sure that more people are sharing in this uplift.

One-off vs Ongoing Advice

There are points in life where one-off financial advice can be useful, typically coinciding with big life events. This could be as clients approach retirement, a relationship breaks down, or they start to plan for the next generation's future.

Yet, the report highlights that ongoing financial advice delivers further benefits. It found that building an ongoing relationship with a financial adviser could help grow wealth even further. Those that regularly took professional financial advice had nearly 50% higher average pension wealth than those that only received one-off advice.

Ongoing financial advice gives individuals a chance to review their financial plans and ensure they remain on track. Even smaller life changes, such as a pay rise, may change the best way to make use of money with long-term goals in mind. Regular meetings with a financial planner can help ensure these are taken into consideration.

David Sinclair, Director of the International Longevity Centre, said: The simple fact is that those who take advice are likely to be richer in retirement. But it is still the case that far too many people who take out investments and pensions do not use financial advice. And only a minority of the population has seen a financial adviser. We must now work together to get more people through the 'front door' of advice.

The Non-Financial Benefit Of Advice: Confidence

The report clearly highlights the financial benefits of working with a financial planner. However, the true impact of financial advice goes beyond simply how much money you have in the bank or your pension.

One of the key areas where financial advice really benefits people is the confidence it gives them.

Clients often seek out financial advice because they're worried about the future. They may be concerned about their retirement position, what would happen if the unexpected were to occur or how they can improve the financial security of the next generation.

We often find that, with some careful planning, clients already have the means to achieve their goals and aspirations. What clients need is the technical knowledge of financial planners to make their savings, investments or other assets work for them, and the confidence it delivers.

Our goal is to ensure each Beaufort Financial client has the confidence to make lifestyle decisions, safe in the knowledge that their finances are in order with their plans in mind. These lifestyle decisions could include:

  • Retiring from work five years early
  • Dipping into savings to help children or grandchildren get on the property ladder
  • Make big-ticket purchases to achieve dreams, such as travelling the world

Whilst increasing wealth is part of what we do, the true impact of financial planning can change lives and we hope to give people the confidence to pursue their dreams.

If you'd like to discuss how we can work together, please get in touch with us.


How Financial Advice Can Help Business Owners Prepare For The Future

Business owners will often engage the services of an accountant, but they're less likely to review their own financial situation with a professional. We explain seven reasons they should.

Whilst business owners may be focused on short-term financial goals, it can be difficult to plan for the future. Those striving to grow a business can find their priorities revolve around their work, whether it's growing a client base or finding new opportunities to innovate. It can come at the expense of their own financial security.

It's common for business owners to engage the skills of an accountant, but how working with a financial planner can help them can be overlooked. But there are plenty of benefits that business owners can take advantage of when working with a financial planner, particularly when it comes to considering the long term. Among them are these seven.

  1. Defining Long-Term Personal Goals

With a business to focus on, some owners find their personal goals are pushed aside. But it can mean the future they want is out of reach when they arrive at that point or they head in the wrong direction.

Financial planning goes beyond simply suggesting where investments should be placed or how much to put into a pension. It starts with understanding individual goals and aspirations, using this as a guide to making financial decisions that are right for each individual. As a result, seeking financial advice can be the catalyst for setting out long-term personal goals. With a sense of direction, these dreams are more likely to become a reality.

  1. Understanding Personal Tax Liability

Organising finances can be difficult for anyone, but there's often an extra layer of complexity for business owners. This is true when it comes to tax liability.

There are numerous regulations and allowances around tax, and it's easy to overlook some that a business owner can take advantage of. For example, are they making full use of their dividend allowance each tax year or how they can take an income from the business in a way that minimises tax? A financial plan can highlight where these issues lie and create an efficient plan with the individual in mind.

  1. Saving For Retirement

Business owners need to take greater responsibility for their financial future; this includes saving for their retirement. But with other decisions to make, pensions can be something that slips their mind. Other reasons for not saving into a pension is concerns over how their financial security may change in the future.

Working with a financial planner can help business owners understand how their current situation can be used to improve financial security in the long term. It's a step that can keep them on track for goals that may still be several decades away.

  1. Making The Most Of Savings And Investments

We all know we should be saving money for the long term and that investments can help assets grow. However, it can be complicated to understand where the best place to put money is. A financial planner can offer business owners advice on how to make the most of their wealth, with their goals in mind. For some, this may include building up a financial safety net to provide peace of mind. For others, it may be building an investment portfolio that reflects their risk profile.

  1. Providing Financial Protection

Many people will take out insurance policies to protect assets, such as contents insurance, but fail to protect themselves. It's something business owners may have overlooked too. If they were to become too ill or involved in an accident, for instance, would they still be able to maintain their lifestyle? An appropriate insurance policy can provide a safety net.

There may be circumstances where insurance policies can protect the business too, such as key person insurance. Financial planning gives business owners an opportunity to assess what's most important to them and take steps to protect it where necessary.

  1. Building An Exit Strategy

What happens when a business owner is ready to move on to the next chapter? Whether they want to retire or take on another project, considering their lifestyle and how to achieve it.

Exit strategies often focus on the business and sale price where applicable. However, financial planning can help put the business owner at the centre of the plans. For example, how much would they need to sell a business for to achieve their long-term financial plans? It's a step that can help give business-related decisions a personal perspective and ensure they're the right ones for the individual.

  1. Benefitting Business Goals

Personal finance doesn't just benefit the individual, it can help them work towards achieving business goals too. For example, a Self-Invested Personal Pension (SIPP) can be used to invest in business premises. This can add to a retirement fund and provide diversification. It can also provide the business with security and the space to grow if needed. There are rules around using a SIPP for business premises but in the right circumstances, it can be very useful.

Working with a financial planner gives business owners a chance to voice concerns or aspirations they may have and explore how personal finances can be used in an effective way that considers their lifestyle too.

If you work with business owners and would like to speak to our team about how we can work together, please contact us.


The World In A Week

The World In A Week - Waiting For The Turn

Although the year is still young, thus far into January markets have seen a broad continuation of the trends we observed in Q4 of 2019, and indeed for many of the last few years. US Equity outpaced other global markets by quite some margin, with the S&P 500 retuning +2.21% in Sterling terms; although this was aided by a mild weakening in the British Pound against the US Dollar. The Price/Earnings ratio for the S&P 500 now stands at 26x on a trailing 12-month basis, as calculated by the Wall Street Journal, that is very expensive indeed on this measure.

Global growth equities have continued to outperform value equities (+5.8% vs +2.6% for the month to date), as they have done in the aggregate since the financial crisis. Again, valuations are stretched to extremes - although we generally view stretched valuations as opportunities to add value rather than risks to be avoided. As a result, we maintain our overweight to Global Emerging Market Equity into the New Year as it offers considerably better value than other equity markets.

On the Fixed Income side, we saw the rally in junk (or high yield) bonds extend from December into January as Global High Yield Debt rallied +0.9% in GBP Hedged terms last week. We are deeply sceptical that there is any opportunity to be had in high yield at current prices and maintain our underweight in favour of Investment Grade Credit. Emerging Market Local Currency Debt, which was one of our most successful positions last year, has pulled back marginally this month (-0.30%) but we remain bullish on the asset class in general and our Fund manager in particular.

On the macro side, we track the Composite Leading Indicators produced for each major economy by the OECD on a monthly basis. The latest data was released this morning and showed a moderate stabilisation in economic data across a range of developed and emerging economies. One among these was the UK, which is interesting in the context of a potential rate cut by the Bank of England. This would be highly premature in our opinion. Employment data is still robust, and while retail sales have been poor in aggregate, most of this is due to business models on the high street being disrupted rather than an underlying economic malaise.

We continue to remain focused on only taking risks for which we are adequately compensated, monitoring market developments for when trends might begin to turn and looking for tactical opportunities to add value to the portfolios.


6 Things The Mini-Bond Scandal Can Teach Investors

The Financial Conduct Authority has banned mass marketing for mini-bonds following a scandal last year, but investors should still keep some key lessons in mind.

Thousands of investors have been sucked into putting their money into unsuitable mini-bond products following extensive advertising, particularly on social media. The Financial Conduct Authority (FCA) has now clamped down on the marketing of such products following a scandal. But many are likely to lose their money.

What is a mini-bond?

A mini-bond is effectively an IOU where you lend money directly to businesses, receiving regular interest payments over the term of the bond. However, the money you make back is based entirely on the firms issuing them and not going bust. As a result, they aren't suitable for most investors. If the business collapses, you're not guaranteed to receive your money back. Mini-bonds are not normally protected under the Financial Service Compensation Scheme (FSCS) either.

The London Capital & Finance scandal highlighted this.

Around 11,500 bondholders poured £237 million into London Capital & Finance after being promised returns of 6.5% to 8%. The investment opportunity was advertised extensively, including on social media platforms. This meant it reached a wide range of investors, including those it may not be suitable for. The firm collapsed in January 2019 and investors could lose all their money tied up in the mini-bonds. For some investors, it could mean losing their life savings or having to adjust plans significantly.

Coming into force on 1 January 2020 and lasting for 12 months, the FCA has banned mass marketing of speculative mini-bonds to retail customers. Over the course of the year, the regulator will consult on making the ban permanent.

Andrew Bailey, Chief Executive of the FCA, said: We remain concerned at the scope for promotion of mini-bonds to retail investors who do not have the experience to assess and manage the risk involved. The risk is heightened by the arrival of the ISA season at the end of the tax year, since it's quite common for mini-bonds to have ISA status, or to claim such even though they do not have the status.

As a result, speculative mini-bonds can only be promoted to investors that firms know are sophisticated or high net worth.

Learning from the mini-bond scandal

The FCA ban aims to protect investors, but some lessons can be learnt from the mini-bond scandal too.

  1. Make sure you understand your investments

Investments can be confusing, but you should ensure you understand where your money is going before parting with your cash. Taking some time to do your research can give you more confidence in your decision and reduce the risk of choosing products that aren't right for you. If you'd like to discuss an investment opportunity and how it fits into your plans, you can contact us.

  1. Ensure investments are authorised and regulated

Investments that are regulated and authorised by the FCA can provide you with protection. The regulation around mini-bonds is much less stringent than for listed bonds. What's more, a business does not have to be regulated by the FCA to issue mini-bonds. As a result, they aren't suitable for most retail investors. Even when a business claims to have regulations, it's worth checking this is true and understanding what protection this offers you, if any.

  1. Make sure investments fit your risk profile

Mini-bonds are considered a high-risk investment. That means there's a greater chance your returns could be less than your initial investment or that you lose all your money. Your risk profile should consider a range of different areas, such as your capacity for loss, investment goals and other assets. In many cases, the risk associated with mini-bonds would be too high for typical investors.

  1. Be mindful of scams

Financial scams are rife, and the mini-bond scandal highlighted why it's important to carry out due diligence. Some mini-bonds falsely claimed to have ISA status, making them more tax efficient. This could mean some investors face unexpected tax charges. However, this claim could also lead investors into making a decision that's wrong for them. ISAs are commonly used products and considered 'safe', in contrast to mini-bonds.

  1. Don't rush into making decisions

When you see an ad with an enticing offer, it's easy to react straight away. However, carefully considered decisions are far more appropriate than impulse ones when it comes to investing. Don't rush into making investment decisions. Instead, take some time to think about what your options are, and which is most appropriate for you.

  1. Be realistic about investment performance

With some money bonds claiming to be low risk whilst offering returns of 8%, it's easy to see why retail investors were tempted. But investments with higher potential returns will carry higher levels of risk too. When assessing investment opportunities, be realistic. Here, the old saying rings true: if it sounds too good to be true, it probably is.

Please contact us if you have any questions or concerns about your investment portfolio. Our goal is to ensure each of our clients is comfortable with their investments, and wider financial plan, including the level of risk involved.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.