Forgive my changing of the word ‘America’ in that headline, but these days it is impossible to ignore the global economic significance of China.
In our market commentary to our clients at the close of 2019, I commented that the US (North American Markets) could be in for a challenging year and I mentioned the dreaded ‘R’ word for recession.
My reason behind this was that US and global markets (to an extent) have been ballooning with very little underlying strength of data. The ‘feel good factor’ in US Equity Markets was driving markets up when other indicators such as US Bond (Treasury) Yields were suggesting something different.
We argued that US interest rates were likely to be cut and that this would serve to benefit Bonds (who like rate reductions) as well as potentially Emerging Markets, who peg their currencies to the US dollar.
To this end, we made more defensive calls and reduced US, Financials and Smaller Company exposure in our end of year review which did look a little silly as January blasted 2020 off into a great start for Equity markets.
We didn’t know about coronavirus at that point. We are good – but not that good!
Nonetheless, our cautious approach has really paid off so far.
The realisation that this virus has no antidote, can re-infect those who have had it already and spreads like wildfire – has hurt markets in the past week. At the point of writing, we have seen a ‘technical correction’ which is a market drop of more than 10% from its top. I think we may see a bear market crash of a 20% drop from the top within the coming days.
I’m not exactly selling ‘being in the market’ right now am I?! Allow me to explain.
The coronavirus is a very worrying problem and one that could affect all of our lives in some way or another. However, it should fade away once the warmer and drier months come. To this end, there will come a point where this virus is not such a headline.
Markets have (in my humble opinion) needed to correct for some time, and recession is something that is a way of life in any economic cycle. Recessions flush out poor companies and expose investments that are not sound. This isn’t always a bad thing.
They also make way for new companies and the ‘R’ word that we love to see in our business – Recovery. Whilst I do think that recession is likely this year, we are much more confident than we were in 2008 when banks were so poorly capitalised and debt to income ratios were at such dangerous levels.
My honest feeling at this stage is that we will not see a deep and protracted recession, and that the recovery phase will definitely compensate investors for their patience.
I do advocate investing at this time. (If it is of any consolation, I put my own ISA in a few weeks ago). The point of investing is that it is for the long term. We always show our clients a chart of the 2008 crash when they first come to invest through us. We ask them to consider how they might react in a dropping market and then show them how swift the recovery can be – even after a very large drop. It is all about time IN the market.
At our quarterly Proactive reviews, which went out to our clients yesterday and today, all of our client portfolios boasted gains way beyond the FTSE 100 over the past year. Interestingly, our Ethical portfolios produced quite remarkable returns – when considering market volatility and the start of this recent drop.
At Thomas and Thomas, we carefully digest information, plan for the worst, diversify and then diligently monitor progress. We also only take on a small amount of new clients each year, so our focus and time is constantly spent on our existing clients.
We are incredibly proud of the way that our client portfolios have navigated 2020’s challenging waters so far, and we are here for you 100% if you need any reassurance, data or discussion about your portfolio.
In summary – perseverance will be the winner in this game. I’ve seen this more times than I can count in my past 22 years of looking after my clients. Stick with it!