Investors in all markets globally now confront the same reality. Valuations of most assets have significantly reduced in a short space of time.
Many will be asking themselves the same questions.
‘Why do I put myself through this?’
We will look at what has happened both recently and longer term. To review what has been lost and gained over different time frames.
The goal being to identify ‘The Facts’, good and bad, from which clients can draw their own conclusions.
The decade 2010 – 2020
The last decade had many troubles.
- The many aftershocks of a generational Financial crisis
- The many troubles of the Euro zone (several debt crises)
- Trade war
- The massive disruption to business models from technology
- Global warming
- Pandemic and potential (SARS and Ebola)
- Oil price collapses
- Terrorist attacks across the globe (ISIS)
Investors confronted these and others, each for varying periods disturbing markets and negatively impacting prices. In short, a lot of stuff, a lot of stress.
Many if given a sneak preview of the problems to come, having just endured the 2008-10 financial mess would have reasonably concluded in 2010: “best I sit this out in a Building Society account, thanks”.
Savings rates 2010 – 2020
At the start of the new millennium, 2000, the Bank rate was 6%.
By 2010, the bank rate was 0.5%; 90% lower from 2000 and it never rose. The U.K. Bank base rate averaged 0.5% for the whole decade. Certainly not the assumption in 2010.
So, sitting out the decade 2010-20 in a savings account, produced an interest yield in a Building Society (at best) 7-9% in total.
Inflation over the decade was 29.07%.
Assuming the 9% interest return was not taxed, the reduction (loss) in the real value of money in a Building Society Account over the last 10 years was around 20%.
If taxed at higher rate, then this is around 24%.
Putting that in pounds and pence terms:
If a cash savings account was viewed by investors as their “insurance/protection” against capital loss, then on £1 million over the last 10 years it effectively cost them (premium charge) £200,000.
£1m fell in real value every year by £20,000 plus.
The purchasing power of the £1m at the end of 2019 was the equivalent of £800,000 in 2010.
But the gradual, continual decline in actual value was not stressful, the capital value (£1,000,000) stayed the same.
A risk asset can be thought of as anything owned which fluctuates in price.
House, Car, Art/Collectables, Gold, Commercial Property, Bonds and Shares.
How did these do over the last decade?
UK housing 2010 – 20
South West +38%
Gold 2010 – 2020
Up around 25% for the decade, increase occurred mainly in 2019.
Commercial property 2010 – 2020
IA UK Direct Property +59.9%
Bonds 2010 – 2020
IA Global Bond +53.47%
IA Strategic Bond +73.57%
Stock markets 2010 – 2020
IA Europe Including UK +126.13%
IA North America +251.22%.
IA Global Emerging Markets +72.29%
IA China/Greater China +111.37%
IA Japan +142.76%
LWM portfolios 2010- 2020
These are a changing mix of the above assets, allocated to all main risk classes.
Cautious + 114.5% (benchmark 57.23%)
Balanced + 140.15% (benchmark 89.00%)
Moderately Adventurous + 147.59% (benchmark 101.37%)
Adventurous + 156.8% (benchmark (104.79%)
So £1m invested in the Balanced Portfolio in 2010 was worth £2.4m at the end of 2019 (before platform charges and fees)
All that is needed, to understand why assets grew strongly, is to understand the fundamental connection to interest rates. Rates staying low the whole decade caused a steady flow of money out of low yielding assets (cash derivatives) into those offering better returns, i.e.
Higher yields (Bonds)
Growth plus income (Property)
Increasing profits and increasing dividends (stocks)
Consistently low interest rates meant that investing in property, bonds and equities between 2010-20, if the stress and anxiety could be tolerated, was therefore the correct decision.
How much have the markets pulled back in 2020
IA UK Direct Property -1.86%
IA Global Bond -2.60%
IA Strategic Bond -6.82%
IA Europe Including UK -19.58%
IA North America -15.80%.
IA Global Emerging Markets -21.45%
IA China/Greater China -4.83%
IA Japan -14.99%
This looks shocking because it is shocking.
The falls have been the fastest and most severe in history.
And then what?
Will things normalise in time?
Yes, they mostly will, and we can know this because the catalyst for the disruption is time limited. That’s to say there is a natural reduction to disruption as medicines for treatment of the virus are identified, herd immunity builds and finally will cease with a vaccine. The question therefore is not if it will, but when it will?
Will there be companies who go bankrupt or business sectors badly damaged?
Yes, this is a certainty. The longer the disruption the greater the damage.
Will there also be companies and sectors whose progress is fast tracked upwards by this?
Yes, there will be winners as well as losers.
What will happen to interest rates?
They are much lower than at the beginning of 2020, in fact they are now zero and will not meaningfully move up for years. There is now virtually no return on cash.
As things are so uncertain should we sell out and buy back when they are clearer?
This strategy historically doesn’t create good results.
If you are going to be investing for the next 5-10 years, then it’s firstly likely asset prices will be much higher in that time frame than they are today. It’s also likely that when news of treatment(s) become known markets will move up very rapidly and this is very hard to capture if you are not invested. So, selling to cash when down and then missing the upsurge actually causes loss to be not temporary, but permanent.
- The returns on risk assets between 2010-20 were powered upwards by low interest rates.
- Rates have reduced in early 2020 to zero so logically this same force for moving funds out of cash into risk markets from 2010-20 has now been given a considerable new boost. Money held in what are now zero interest bearing assets, is in the Trillions, and will need to reposition for positive returns. It won’t all happen straight after the crisis but there will, as was the case between 2010-20, be a continual flow in that direction ongoing.
- Arguably the stimulus to asset prices from low rates had in the main played out by 2018/19. Certain assets were for the first time since 2010 starting to look expensive and our expectation of ongoing returns were lower to reflect this. Interest rate stimulus to move cash into assets has now been significantly rebooted and many long-term quality assets are attractively priced.
The additional significant tailwind of uplifted Governmental fiscal spending to boost economies. This was not present between 2010-20 but will be from 2020-30.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.