Covid 19 – Our take on the current situation & markets

23rd March 2020

Although it may seem like the world is falling apart around you with markets heading south daily, and the numbers of reported cases and deaths each day caused by the Covid 19 outbreak on the rise, rest assured, this is not the end of the world as we know it.

Mark Dean Wealth Management might have only been in business since 2010, but we have some very experienced advisers with many years of experience behind them, and have lived and worked through times like these before.

Admittedly, every market down-turn is triggered by a different set of circumstances. This time it happens to be all about the virus outbreak that no one could have foreseen, but last time is was the ‘credit crunch’ (as it was often referred to) and everyone then thought it was the end of the world.

Without wanting to sound too clichéd, it’s always darkest before dawn. But more importantly in this situation, while it might feel terrifying, the world is not ending. The financial system is not about to collapse. Even before the virus outbreak began to affect financial markets there were good fundamentals and a reasonably optimistic outlook on global future growth prospects.

So What next?

Frankly we don’t know – and we’re certainly not going to try and guess. What we do know is that a company trading at a third or even 50% cheaper than it was only a few weeks ago, when we were quite aware that it already faced a tough couple of quarters, is a buying opportunity – not a time to sell in a panic.

The psychology of investors frequently leads them to overlook something staring at them in the face, until they suddenly reverse course and pathologically focus on that set of facts that they had previously dismissed as unimportant. Hence the complete shift in investor sentiment between February and today concerning the impact of the Coronavirus.

The late economist Charles Kindleberger, author of the classic “Manias, Panics, and Crashes”, poignantly exposed numerous examples of situations where investor exuberance gives way to a reality check (how coronavirus will cause economic distress in this case) and led the financial system to move into a distressed state, followed closely by panic. And this is where we are at present.

Lessons of the past

To put this into some sort of perspective, at similar points in recent US bear markets, the equity correction following 9/11 led to markets dropping by 14% and did not lead to a technical recession, defined as two consecutive quarters of negative GDP growth. The bear market in 2008/09 saw a market drop of 19% at this point in the correction, but this led to a serious recession which took years for the US and Europe to recover to Q1 2008 GDP levels.

The current market has already fallen by almost 30% since late February and could fall further, but this seems overdone given that the inevitable recession seems more likely to be sharp and short. Unlike the 2008 crisis, which could have imitated the 1930s had governments not learned lessons from the Great Depression (when 1929 US GDP did not recover until the 1940s), this will be a time-limited recession (i.e. discover a vaccine or slowdown the growth rate), and one which will be greatly aided by the fiscal packages that governments have announced over the past few weeks and further measures that will undoubtedly follow.

Even if financial markets decline further over the next few weeks, there is not the systemic risk that existed in 2008 and markets have almost certainly oversold, leaving an almost unprecedented opportunity in the next few weeks and months.

What about the science ?

We’re no epidemiologists, but the one thing we do know is that this will pass at some point and markets will rebound. The infection rates right now are horrifying, even if the mortality rate gives us some comfort.

The measures that governments in the western world up until now have been taking have been found wanting and are therefore likely to enforce those measures even stronger with fines and penalties. This can only contribute to rising fear and panic that is exponentially more infectious than the coronavirus. Scaremongering media also doesn’t help. Uninformed comments from politicians and commentators don’t help.

From the basic facts that we understand, lead us to believe that in 6-12 months we will look back on this horrific period with a sense of relief and a more relaxed and considered perspective. We are not going to attempt to offer an opinion on the science behind the coronavirus contagion, but there are certainly strong signs of encouragement that are being ignored by financial markets as Europe and the USA move further into meltdown.

First, there is a clear sign of slowing infection rates in China, meaning that the current restrictive practices in Europe and the onset of summer perhaps offers tangible hope to the Northern Hemisphere countries.

Second, against this backdrop of slowing infection rates, UBS reports that only 0.005% of the Chinese population is infected. Even if all these people were to die, and this was to be followed by much larger infection/death statistics in Europe and North America on a per capita basis, these numbers are far smaller than what the financial markets are currently discounting.

Third, scientists around the world are concentrating on providing a vaccine solution in what would appear to be an unparalleled coordination by the global scientific community. Moreover, this was originally given impetus by the Chinese efforts to sequence the genetic material of SARS-CoV-2 and sharing that sequence with research groups around the world. As a result, 35 companies and academic institutions are working to create such a vaccine, and the first human trials are starting imminently. Although a breakthrough on developing a vaccine puts an instant end to this current crisis, the fact that progress is being made on several fronts will soon filter through to the general public over the coming months and even pessimists believe that a vaccine solution is 12 to 18 months away. Yet this virus is unprecedented in so many ways, and so it is in respect to the amount of resources dedicated to the problem, meaning that it is not inconceivable that a vaccine will be found considerably sooner.

The World Health Organisation (WHO) reported a Case Fatality Rate as high as 3.4%, and this dramatically increased bearish sentiment in the markets, but this simply measures the number of deaths divided by the number of reported cases, and it looks increasingly like there are many people who have been infected but have not been reported in the statistics that are offered daily in the press.

The UK’s announcements last week of much more draconian isolation guidelines, also involved the government making the interesting observation that the UK will soon be testing for those who had recovered from the virus but had not been previously tested and might well dramatically increase the denominator and give a much different outlook to what is currently discounted by the markets. Anything approaching this realisation will have a dramatic impact on the global financial markets.

Will the recovery be V, U, L or W shaped?

Again – we don’t know, and we’re not in the business of trying to predict. But experience tells us that for anyone with a time horizon longer than a few months, this is a wonderful buying opportunity. Whether that’s today, or next week, or next month.

Many experts in the investment world have been trying to anticipate if the recovery from this market shock will be a V, U, L or W shaped recovery. In other word’s a ‘V’ shaped recovery means the markets reach the bottom and bounce straight back to where they were before the crisis in about the same time as we have had the crisis. By our reckoning the financial markets seemed to wake up to the fact that this may be a major issue on 19^th February, so it has been with us for just over 1 month. We feel it is unlikely that the markets will perform a V shaped recovery and get back to where it was in the next month. There is no expectation in the short term of a vaccine or miracle cure so we can realistically rule out a V shaped recovery.

A ‘U’ shaped recovery is broadly similar to a ‘V’ shaped recovery except it is expected to happen over a slightly longer time period of 4 to 6/12 months and the market gradually recovers.

An ‘L’ shaped recovery is the worst possible scenario where the markets fall and then just continues to flat-line with no recovery occurring.

A ‘W’ shaped recovery is where markets start to show signs of recovery as the numbers of cases reported and resultant deaths begin to decline but all of a sudden, the numbers start to increase again and cause the markets to dip again.

The sheer panic that has infected the markets is due to a feeling of there being an economic black hole whereby it is impossible to measure the financial downside for a given investment.

Remember, markets hate uncertainty and at times like this will almost always over-play their hand in terms of being too pessimistic on the downside or too optimistic on the upside, which in turn provides buying or selling opportunities and as far as we see it, this is a fantastic buying opportunity for investors with a longer term investment horizon.

Budget Update – March 2020

13th March 2020

The newly appointed Chancellor, Rishi Sunak, announced a Budget with a repeated emphasis on ‘getting things done’, echoing the recent election campaign.

His initial focus was on the short-term measures needed to deal with the challenges the UK faces as a result of the coronavirus pandemic. These amounted to a £12bn fiscal stimulus, with more available if required. There was help for both businesses and individuals.

For the coming year, statutory sick pay will be available to more people and so will some other social security benefits. Business Rates will be reduced or even eliminated for some smaller businesses – at least in the short term. Other immediate support initiatives for smaller businesses include greater access to bank lending, as well as enhancements to the HMRC ‘Time to Pay’ service.

The Chancellor is due to announce another Budget in the Autumn and so there were several consultations about possible future tax changes, including new proposals on the treatment of fund management companies, pension tax administration, and aspects of research and development tax credits.

Some of the other highlights were:

The changes to the taper of the pension annual allowances will mean that many fewer higher paid people – especially important for the NHS – will be hit by a reduced annual allowance.
The reduction of entrepreneurs’ relief to £1 million of gain was well trailed, and for a time abolition seemed a possibility.
More than doubling of the annual limit for Junior ISAs to £9,000 was a pleasant surprise.
Smaller businesses will welcome the increase in the NIC employment allowance to £4,000.
Publishers should be very pleased by the decision to make electronic publications zero-rated for VAT.
From April 2021, only electric and other zero-emission cars will qualify for first year allowances and cars with emissions over 50 g/km will qualify for writing down allowances of just 6% a year.

Pensions

The Chancellor decided to raise the annual allowance taper by £90,000 immediately from this April. For the tax year 2020-21, the threshold income will be £200,000 as opposed to the current £110,000. The annual allowance will only begin to taper down for individuals who have an “adjusted income” above £240,000. In other words, the taper now kicks in for those with adjusted income between £240,001 and £312,000 though the lowest relief can fall to £4,000, lower than the current £10,000.

The Government wanted to resolve the issue for senior NHS staff and, especially, to end the disincentive for doctors to work additional hours. It believes it has now removed the vast majority of them from facing additional tax bills. That could prove very important if the NHS is trying to catch up with a backlog when Covid-19 does finally relent.

In a more run-of-the-mill change but still a helpful one, the lifetime allowance itself will increase in line with the consumer price index (CPI) for 2020/21, rising to £1,073,100.

Generally, we welcome the decision not to radically alter tax relief more broadly either in the quest for extra cash or indeed of ‘levelling up’ the pension system. In our view, it would really have been levelling down.

Entrepreneurs Relief and ISA changes

There were no changes to personal income tax rates, bands or allowances. Capital Gains Tax threshold will rise to £12,300 from 6^th April 2020. The big loser is entrepreneurs Relief, which has been cut back from £10m to £1m. More business people will face a full 20 per cent CGT bill on the bulk of money raised from the sale of a business rather than the current 10 per cent.

But the Chancellor has also given back at least a little – so for example, the national insurance threshold will rise to £9,500 and the junior ISA limit will rise significantly from £4,368 a year to a much more generous £9,000.

This means that, at the age of 16, a child can have access to both an adult ISA as well as their JISA, so can potentially put away £29k tax free, starting from April this year.

Inheritance tax

The residence nil rate band will increase from £150,000 to £175,000 from April 2020, delivering on the Government’s commitment to allow some couples to leave an IHT-free inheritance of up to £1 million to future generations.

Despite recommendations to make sweeping changes to the Inheritance Tax legislation by the Office of Tax Simplification, no changes were announced.

Property tax

From 1 April 2021, non-UK resident buyers of residential property will pay an additional 2% of stamp duty to help ease house price inflation and make homes more affordable to UK residents

Funding the giveaway

The Budget has been financed in part with the direct fiscal savings associated with Brexit – the contributions no longer required (net of the divorce settlement) and the customs duties no longer remitted to the EU – and by cancelling the corporation tax cut that was due in April.

But tax receipts will rise a little too. Revenue from income tax and National Insurance contributions will go up by 0.7% of GDP over the course of this Parliament because unchanged personal allowance and higher rate thresholds mean more people will be dragged into higher tax bands. Capital taxes are boosted from 2021-22 onwards by the big curtailment of entrepreneurs’ relief. According to the government there is no evidence this relief actually encourages entrepreneurialism.

But the huge amount of new spending announced Wednesday will be financed mainly through higher borrowing.

The fact is, governments with their own mints can spend as much money as they want. The government’s ability to finance itself is ultimately constrained only by inflation. It collects taxes and issues debt.

If inflation expectations remain low, a government with its own currency can run deficits ad infinitum. Just look at Japan, the sustainability of Japan’s debt rarely gets mentioned these days, even though its net debt ratio is c.150% of GDP (the UK’s is c.80%).

Excluding the virus-related stimulus, the OBR expects the economy to grow by just 1.1% in 2020, even with the purse strings significantly loosened. This shows what a weak state the UK economy is in. Indeed, this may even be a bit optimistic.

Assessing the impact of Covid-19 itself and the related stimulus is extremely difficult. We do not know if the disruption is likely to lift rapidly in the second quarter or carry on for some time. On balance, the extra stimulus announced by Mr Sunak is likely to be offset by the cost of the disruption. It is unclear at the time of writing whether the stimulus would remain in place for the full year if the disruption lifts quickly.

Gilt yields and interest rate expectations were little changed following the Chancellor’s speech. The pound weakened a touch, but that could be due to the general risk-off move in global markets that has little to do with UK fiscal maths. The more pertinent question for investors is: will the EU and the US do more to stimulate the economy? We’ll continue to monitor the developments and endeavour to keep you up to date.

If you have any questions about the summary’s contents or how any aspects of your tax and financial planning may be affected by the Budget, please call us to discuss them.

Impact of Corona Virus on Markets – Our View

1st March 2020

There’s no doubt that last week was a torrid time for stock markets around the world with some being down more than others.

It’s difficult to calculate the impact Boris Johnson made on Thursday when announcing he would be happy to walk away from trade negotiations with the EU in June if things were not to his liking (a bit like a child saying “it’s my toy, so if I don’t win we won’t play anymore”).

You could also say that last week was a good time for burying bad news as everything was dwarfed by the panic and fears created by the seemingly impossible to stop spread of COVID-19 otherwise known as Corona Virus.

Oddly the emerging market indices suffered less than the developed markets, as you can see from the chart below which runs from 19th February, which was when the markets around the world seemed to realise this was going to have an effect:

I have read reports and research that range from complete Armageddon to don’t worry just carry on as you were. The fact is that financial markets will always over-react to events and this can be a positive over-reaction where prices seem to increase daily as the optimism just grows and grows, like the dot com bubble, or they over-react to the negative which is mostly driven by fear, and of course much of this fear is fuelled by the media pumping out the news about the negative event that can capture the most audience attention. Look what happened when Robert Peston stood outside a branch of Northern Rock on the 10 o’clock news and said banks were in trouble, next day there were ques around the corner and the bank went bust (a self-fulfilling prophecy).

I am not trying to be-little in any way shape or form the seriousness of the effects that the spread of this virus might have or the poor people that have suffered as a result of this virus, but when I see headlines on a newspaper that say ‘UK Gripped by Killer Disease’ (when there are 63.5m people living in the UK and just a handful have been diagnosed in the UK and the mortality rate is just 2% or even lower) it tells me the journalist are hard at work to instil maximum fear and create panic which in turn will create more stories. It is more about the restrictions of trade for services and goods that the markets fear, as this affects profits of companies.

As a longer term investor, you should be able to see this for what it is (part of the investment journey), markets will go up and down all the time, this is the nature of longer term investing. Neither you or I can predict the future, but we can diversify our portfolios so as to cope better with the up’s & downs of the markets. That’s why I always talk about the importance of your risk profile and the asset allocation should match your risk score, then your portfolio will perform (95% of the time) in line with your growth expectations and in line with your anticipated volatility levels. I’m sure you have also heard me going on about ‘if you had missed out on the 10 best days over the past 10 years your returns would be 50% of what they are today’ (see article in our Financial Focus magazine Oct 2019) so sit tight, try not to watch the news (or if you do, then do not let it influence you to the negative). If anything, this is exactly the sort of time you should be thinking of investing, you might not catch the bottom, but you will certainly buy in at a cheaper price than it was a week ago.

I could go into detail about the numbers of people affected and have a guess about where we go from here, but the fact is I do not have a crystal ball, nor do any of us (that includes the journalists, but they are not regulated like me, so they can say whatever they like).

If you feel the need to discuss this matter further then as usual feel free to either call or send an e-mail.