An end to uncertainty?

Autumn Market Update

On 14 October 2020, Quentin Marshall, Head of Private Banking, and John Butters, Chief Investment Officer, hosted a webinar for clients to discuss the global pandemic and what it means for the economy, stock markets, taxes and house prices.

How has the pandemic affected the UK economy this year?

Simply taking a look at the traffic levels in London gives you a good sense of how the UK economy has been hit this year. Levels dropped off sharply in March, but they have been gradually recovering and are now back to where they would have been a year ago.

Certainly, some parts of the economy have been getting going. We have seen from regular economic surveys, such as the purchasing managers indices (PMI), that there has been a rebound in manufacturing, not just in the UK but around the world. But most of us aren’t moving around as much as we were. For example, movement in the retail and recreation sector is down by 28%, while the use of public transport is down by 37%.

However, social restrictions have hurt the economy. Compared to a year ago, UK GDP is down 21.5% and it is clear that we suffered more than others in the second quarter. However, if you compare us to other countries over one year, many have suffered similar GDP falls (France down 18.9% and Spain down 21.5%) although this could be because the UK went into lockdown later and came out later. The US is faring better – its GDP is only down 9% year on year, although that could be because it has had looser restrictions than elsewhere.

Hopes of an economic rebound lie with people returning to work quickly, and this is perhaps a little ominous. We are witnessing redundancies and if those redundancies feed through into lower spending and weaker economic growth, then clearly things might not be as optimistic as some of the recent economic forecasts suggest. The economic researcher, Capital Economics, was expecting UK GDP growth of 9% this year and was forecasting a 7% increase in 2021. But in light of recent Covid-19 restrictions, it now believes the economic recovery will be put on ice and will prevent the economy from climbing back to its pre-crisis level until the end of 2022.

How has the pandemic affected stock markets this year?

Global markets dropped sharply in March and they have been rebounding since, so much so that they are up for the year. However, this isn’t true of the FTSE 100 Index or UK equities in general and portfolios that have a UK bias will likely be nursing losses this year. The FTSE 100, for instance, is down around 20% year to date. On the other hand, our Weatherbys portfolios are globally weighted. They have a greater exposure to global equities and, as such, are up this year.

We believe the argument for having a UK bias in an investment portfolio is getting weaker and weaker. The UK’s share of global markets has been declining for several years and now represents just 3.54% of the global market. There is, in our view, an issue with the UK market. Yes, the UK has lots of exposure to energy and banks – more than other markets – but its exposure to the information technology (IT) sector is very small, just 1.41%. This is the main reason for the UK’s underperformance compared to global markets. The UK hasn’t got a big IT exposure, yet these stocks have done pretty well elsewhere in the world, and that has been a huge problem for investors with a UK bias in their portfolios.

Ever since the 2008 global financial crisis, many investors have said they dislike government bonds. We disagree with this view and continue to hold funds that track bonds in our clients’ portfolios. Performance of certain government bonds has been almost as good as the performance of global stocks since 2011 – and even better at certain times. The long-duration gilt index fund we use rose almost 20% at one point this year as stock markets were falling. This counterbalance is very helpful for our clients’ portfolios.

Will the significant financial support from the government lead to higher taxes?

Given the sizes of the financial support and borrowing, it is possible but unlikely. The actual running cost to the Government of the borrowing needed during this crisis is incredibly low. What really matters is how fast the economy recovers and with it normal tax revenues (and lower social security costs). Right now, raising taxes would damage an economic recovery. It may be that no tax rises are needed as zero cost debt repayable in up to fifty years’ time leaves plenty of room to grow ourselves out of the problem. However, we are talking to those clients who have got significant capital gains in their portfolios. We believe this could be a time to consider selling a portfolio that you’ve been reluctant to sell in case we’re wrong and capital gains tax (CGT) rates do go up.

Will house prices continue to rise?

If you look at the history of house prices going back to the 1850s, it shows that until the 1920s prices stayed flat. They then started to rise, before rising more steeply after the Second World War. House prices continued to climb at a relatively consistently strong rate until just before the 2008 global financial crisis and then started to go back on the rise. Will house prices continue to go higher? Quite possibly.

If you compare house prices in the UK with those in the US, UK house prices rise much more strongly. One argument is that we are a small island. We are not forecasters, but if you back that argument, then yes, house prices might well continue to increase. It is perhaps interesting to note that historical analysis shows that when house prices have fallen, they haven’t fallen nearly as much as equity markets.

With the pandemic, Brexit and the US elections to consider, what should investors do?

Ride it out, remain calm and don’t make any knee-jerk reactions. Ensure you have a sensible portfolio which is diversified globally, keep your costs low and make sure you haven’t got more risks than you can handle. Whatever the result, I suspect we will see fiscal stimulus after the US election. And that, of course, can make things great. Huge stimulus by the world’s biggest economy could result in another great year in markets despite the Covid-19 crisis.

If you would like to discuss your investments please speak to your Private Banker to arrange a call with John Butters, CIO, and his team.

John Butters

Chief Investment Officer, London

John Butters joined Weatherbys Private Bank in 2016 and leads the investment and financial planning team. Prior to joining Weatherbys he developed an investment service for Aspinalls Family Office. He has also worked as a portfolio manager at the multi-family office Sand Aire, where he managed several investment funds, and at a London hedge fund which inspired his book on macroeconomic analysis, Rational Macro. John holds the Chartered Financial Analyst, Chartered Alternative Investment Analyst and Certified Financial Risk Manager qualifications and is a Chartered Member of the Chartered Institute for Securities and Investment.

Quentin Marshall

Head of Private Banking, London

Quentin joined Weatherbys Private Bank as Head of Private Banking in June 2015 from Coutts where he had been Head of Advisory within the investments team and deputy chairman of the Investment Strategy Committee, overseeing c. £30bn of assets. Prior to Coutts, Quentin worked for UBS for sixteen years, joining predecessor firm SG Warburg from university as an Investment Banker. During this time he spent four years advising the Republic of Indonesia during the Asian financial crisis. He also acted for some of the largest FTSE100 companies raising capital and working on mergers and acquisitions. He subsequently specialised in advising family owned companies, moving to UBS Wealth Management to help create the UBS Family Office Group.

What we do for our clients

At Weatherbys we take a holistic view of your current assets and future spending requirements. We use this information and work with you to develop a cash flow plan that helps you to map out your fiscal requirements and demonstrate how various different scenarios might affect those needs.

However, as we all know, life does not move in a straight line and there will be occasions when your cash flow plan will need re-evaluating. If your circumstances have changed or you are at all concerned, then please do not hesitate to get in touch with your Private Banker and we will rerun your plan for you.

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Important information

The information contained in this article does not constitute financial advice or a personal recommendation. Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.

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