When the COVID-19 pandemic struck, the severity of its impact on global societies and economies was shocking. Yet critics are insisting that the repercussions could (and should) have been foreseen. Does this make it a ‘black swan’ event?

Originally coined by financial theorist and writer Nassim Nicholas Taleb, the term ‘black swan’ has come to denote any event that:

• Is extremely rare
• Has a severe impact
• Is unpredictable (although some may claim in hindsight that it could have been predicted).

Historic black swans

Examples of black swans from history include the Spanish flu outbreak (1918), Wall Street Crash (1929), ‘Black Monday’ (1987), the terrorist attacks on the World Trade Center (2001), the SARS outbreak (2003) and, more recently, the global financial crisis (2008).

Black swan – or not?

While it may seem a textbook case on the surface, some are arguing that COVID-19 does not constitute a black swan event. Severe impact? Undoubtedly. Rare? Perhaps. But unpredictable? Maybe not.

History shows us that significant outbreaks of infectious diseases do happen. What’s more, Bill Gates, George W. Bush, Barack” “Obama – and Taleb himself – have all previously issued dire warnings about what could happen if we failed to prepare for future pandemics. Can we really say, then, that the coronavirus pandemic was completely unpredictable?

The COVID difference?

Those who say it is a black swan event have pointed to the unique brutality and speed with which the virus spread around the world and hit financial markets. In the words of one financial commentator: “It has been incredibly fast-paced, faster than ’29, faster than ’87. The speed and ferocity has been utterly breathtaking.”
Even so, Taleb himself suggests that coronavirus does not fit his description of a black swan event. Yes, it has had a severe impact on the global economy and people’s lives. But there are also multiple examples of serious global outbreaks from the 21st century alone – Ebola, SARS and the H1N1 influenza pandemic all spring to mind.

Weathering the storm

Black swan event or not, you can rely on us for advice and guidance on weathering any storms that lie ahead.”

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

In uncertain times, where we’ve witnessed periods of stock market volatility, it’s easy to let emotions influence investment decisions, but a good strategy for investors to adopt is not to react hastily. Human instinct is to be responsive, so traversing these behavioural biases can be challenging, but once mastered, resisting the urge to flight can be rewarding.

Unlike prehistoric times, when the fight or flight reaction meant the difference between life and death in the face of a carnivorous dinosaur on the prowl, survival depended on quick pattern recognition and decisive action. As an investor, controlling these hard-wired behavioural biases and learning to resist the urge to panic, can bear fruit.

Take stock market volatility in March this year as an example. Retail investors sold investment funds worth £10bn in just one month3, with many selling just as the stock market was falling to its lowest level in eight years. In doing so, they missed out on the subsequent market bounce of almost 30%. If hindsight is a marvellous thing, by its very definition, foresight is insight gained by looking forward. In other words, when it comes to investing, look forward, because markets tend to bounce back over time, though it can’t be guaranteed.

Different drivers

A number of factors lead people to respond differently to market occurrences – what your objectives are, your risk tolerance,” “beliefs, preferences, emotions and past experiences, can all result in different investor behaviour. One event, such as a market fall, can lead to different behaviours; ceasing investing until markets stabilise, selling in case it’s the beginning of a market downturn, or contrarian investors may see the correction as an opportunity to invest. Some beliefs could lead to successful investment outcomes, others could result in behavioural biases that are counterproductive and endanger the prospect of successfully achieving your objectives.

Managing behavioural biases

As humans, we all suffer from some biases. The best defence mechanism to safeguard from knee-jerk reactions and defend against the influence of your biases, is to follow a robust, objective and disciplined process, and that’s where we come in. In addition to having a well-thought-out investment process, investing with a clear idea of what you want to achieve, will determine how we structure your investments. Whether you are building your retirement nest egg or a fund to put children through university, you have a better chance of achieving your goals if they are used to frame all investment decision-making.

Foresight
You can rely on us; we take the time to understand your objectives, apply a rigorous investment process and advise you on the investment strategies and products most appropriate for you.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

With the release of Q2 data over the summer, the full extent of the impact COVID-19 has had on the global economy became apparent, as a succession of countries reported record falls in output, with lockdowns causing inevitable and acute economic disruption.

Although uncertainties surrounding the pandemic are still inflicting economic stress across the globe, there are signs that the worst may be over. Many economists believe the sharpest declines are now consigned to history, but the likely pace of recovery remains unclear.

On home shores
Preliminary Q2 gross domestic product (GDP) statistics show the UK economy was hit particularly hard, with a 20.4% reduction in output in Q2 compared with Q1. The country’s largest ever quarterly decline pushed the UK into its first technical recession since the financial crisis.

Around the globe
Output across the Eurozone shrank a record 12.1% during Q2, with Spain suffering the largest decline, its economy shrinking by 18.5%. France and Italy were also badly hit, with quarterly declines of 13.8% and 12.4%, respectively.

Preliminary estimates for the US suggest the world’s largest economy shrank at an annualised rate of 32.9% in Q2, the sharpest decline since government records began in 1947.

In Japan, the world’s third-largest economy, GDP fell by 7.8% in Q2, which represents the fastest quarterly rate of decline since” “comparable figures were first recorded back in 1980.

A tentative recovery?

Despite Q2 data for advanced economies painting a bleak picture, a recovery of some sorts may be in the offing. In the UK, the Office for National Statistics said the decline was concentrated in April at the height of lockdown, with the economy bouncing back in June as restrictions eased.

Recovery seems underway in China; the economy returned to growth during Q2, the world’s second-largest economy growing 3.2%. This follows a historic 6.8% Q1 slump, China’s first contraction since at least 1992 when records began.

The International Monetary Fund (IMF) predicts the global economy will shrink 4.9% this year, a downgrade from previous projections. This downgrade reflects the likelihood of social distancing restrictions persisting for a longer period and the subsequent impact on consumer spending. Voluntary social distancing by people wary of exposing themselves to the risk of infection is also expected to make consumers cautious.

“The strength of this recovery is highly uncertain”

Next year, the IMF predict the global economy will expand by 5.4%; however, they stress there is a higher-than-usual degree of uncertainty surrounding its predictions. IMF Chief Economist Gita Gopinath commented: “The strength of this recovery is highly uncertain. On the one hand, you could get positive news, you could have better news on vaccines and on treatments and greater policy support, and that can trigger a faster recovery. But on the other hand, there are important downside risks, too,” “which is that the virus could come back up. You could have financial tightening that could lead to debt distress. So, there are both upsides and downsides.”

It seems the only real certainty at the moment is that these are likely to remain uncertain times. Rest assured, we remain on hand to navigate any uncertainty together.”

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

The pandemic has inflicted enormous human costs right across the globe. The worldwide response, which has involved governments imposing a range of lockdown measures, will inevitably have a huge impact on global economic activity.

Contraction across Europe

The release of first quarter GDP data provided a foretaste of the economic damage the pandemic is set to wreak. In the UK, for example, output fell by 2% across the first three months of 2020, with the economy shrinking by a staggering 5.8% in March alone.

Data for the 19-country Eurozone showed an even larger decline, with output across the bloc falling by a record 3.8% in the January– March period. France and Italy both plunged into recession, with quarterly contractions of 5.8% and4.7%, respectively, while the German economy also slipped into recession with first quarter GDP down 2.2%.

US and Japan economies shrinking According to preliminary estimates, the US economy shrank at an annualised rate of 4.8% in the first quarter, ending a record streak of expansion stretching back to 2014. And the Japanese economy, which was already struggling following a sales tax hike last October, also fell, contracting at an annualised rate of 3.4% in the opening three months of 2020.

China’s economy also reeling

The growth rate in China fell sharply as well, with the world’s second-largest economy shrinking at an annualised rate of 6.8% during the first quarter. The Chinese authorities have now abandoned setting a growth target, which may be an acknowledgement of the challenges facing its struggling economy amid heightened international hostilities due to the COVID-19 fallout.

‘Sharpest downturn since 1930s’

Continuing uncertainties surrounding the future spread of COVID-19 and the likelihood of developing a successful vaccine obviously make it difficult to predict the future path of the global economy. However, the International Monetary Fund’s latest assessment suggests we are facing the steepest economic downturn since the Great Depression.

Potential rebound?

While the IMF has stressed that its predictions are marked by ‘a higher- than-usual degree of uncertainty’, it is forecasting a rebound next year with the global economy expected to grow at a rate of 5.4% as activity normalises. However, if a second outbreak did occur, that could effectively keep the world in recession for a second consecutive year.”

Source: IMF, 2020

Almost exactly 50 years ago, a company few people had previously heard of was hitting the headlines as the price of its shares went stratospheric. A few months later it came back to earth with a crash. Fortunes were made and lost after mining company Poseidon announced the discovery of new nickel ore reserves in Western Australia just as world nickel prices hit a new high.

Poseidon misadventure
Poseidon shares had been trading at A$0.80 in the second half of 1969 when they took off. The price climbed relentlessly for weeks as investors claimed their piece of the action. One day in February 1970, the shares touched A$280.00. Then the profit-taking began and the share price crashed. Nickel prices later dropped back and the Poseidon nickel ore was low quality; receivership ensued in 1974.

Fast-forward 20 years and a new ‘rising star’ of the stock market burned out. A minor fashion house called Polly Peck had been acquired by new owners in 1980 and used as a vehicle for ventures in Northern Cyprus.
A series of deals in the 1980s brought such growth that the company’s shares entered the FTSE 100. In September 1990, Polly Peck shares were suspended amid fraud allegations.

FOMO frenzy – 300 years ago!
The loss suffered by many investors in Poseidon or Polly Peck was a painful lesson about impossible returns and concentration of risk. There had been plenty of previous warnings, right back to the South Sea Bubble in 1720, about blindly following the herd in a FOMO frenzy. Speculative investment has always had particular risk attached and that is all the greater if it is not diversified.

The value of diversifying your portfolio with collective investments

As a general principle, any investment in shares needs to be spread around, so that if one share price slumps badly it only affects a proportion of your overall portfolio. For many investors, a sound way to achieve a spread of risk is through collective investment schemes with risk profiles aligned to suit their needs. We can advise on the investment strategies and products most
appropriate for your objectives and needs.

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Speculative investment has always had particular risk attached and that is all the greater if it is not diversified

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Stock markets around the world are suffering a major period of volatility as a result of the COVID-19 outbreak. Although markets do not respond well to periods of uncertainty, what is certain is that volatility goes hand in hand with stock market investment; and although market movements can be concerning, we have all become much better at expecting the unexpected, experience has taught us that. Both the Chancellor, Rishi Sunak, and the outgoing Governor of the Bank of England, Mark Carney, were keen to emphasise the temporary nature of the economic impact of COVID-19.

…“keep your head when all about you are losing theirs””

Focus on the long-term

To navigate market volatility, it’s best to stick to your plan, diversify your holdings and very importantly, expect and accept volatility. Investors with diversified portfolios, who stay in the market, have historically and consistently experienced steady gains over time. Even though it can be difficult to ignore daily market movements, it is vital to focus on the long term and remember that volatility also presents investment opportunities.

A clear head will stand you in good stead As Rudyard Kipling wrote, it’s important to “keep your head when all about you are losing theirs.” Investment requires a disciplined approach and a degree of holding your nerve if markets fall. Investment professionals know that markets can be volatile and will inevitably go down as well as up from time to time. The worst investment strategy”
“you can adopt is to jump in and out of the stock market, panic when prices fall, and sell investments at the bottom of the market.

Finger on the pulse

Instead of being worried by volatility, the best strategy is to be prepared. A well- defined investment plan, tailored to your objectives, in line with your attitude to risk, that takes into account your financial situation, can help you weather short-term market fluctuations. Market volatility is a timely reminder to keep your investments under regular review.
We aim to manage the inherent volatility of markets, so your savings have the best chance of growing for the future – without giving you sleepless nights and whilst ensuring you aren’t taking too much, or too little, risk with your money.”

Transferring wealth from one generation to the next is a difficult conversation topic, but with the baby boom generation expected to pass down a record-breaking amount of assets over the coming years, confronting this taboo has never been so important. And experts suggest that, while discussions involving money can be uncomfortable, the best approach is invariably to talk.

The next 30 years are expected to witness the largest ever intergenerational passing of wealth as baby boomers – the wealthiest generation in history – prepare to pass on assets to their heirs. Commentators have dubbed it the ‘great wealth transfer’ with estimates1 suggesting an unprecedented £5.5tn could be set to pass between generations in the UK.

Elephant in the room

While the significance attached to the wealth transfer process is unquestionable, most families remain uncomfortable talking about money, with finance among the few remaining taboo topics. As a result, discussing money issues with their children can prove a difficult task for many parents, with conversations typically awkward or The Great Wealth Transfer: why it’s good to talk
stilted. However, it is vitally important retirees involve their offspring in financial planning decisions if the wealth transfer process is ultimately to be successful.

A balancing act

The issue of inheritance unsurprisingly raises a number of concerns for parents. For instance, there is the dilemma of wanting to help children financially while not dampening their offspring’s work ethic. In addition, parents need to balance the emotional desire to leave significant sums to heirs with the need to ensure their own financial wellbeing, particularly in an era of spiralling long-term care costs.

Start the conversation

Arguably the key inheritance challenge, though, remains ensuring your children are ready to take on financial responsibility for family assets. Encouraging their involvement in your financial planning decisions now is a particularly good way to boost their financial literacy and ensure they are ready when the time comes. So, introduce them to us and we can help you start those difficult conversations.

*Kings Court Trust, 2018

Green Shoots Of Spring?

As we enter a new decade, the global economy seems to be precariously balanced. Although recent data supports this pessimistic prognosis, forecasters suggest 2020 is set to observe a recovery.

Global growth rates

Gross domestic product (GDP) data for the third quarter of 2019, highlighted a continuing decline in global growth. In the US, GDP grew at an annualised rate of 1.9%, just below the 2.0%  recorded in the second quarter. China’s growth rate of 6.0% was the country’s slowest in over 27 years. While both the UK and German economies experienced growth in the third quarter, neither economy particularly flourished. The UK recorded its slowest annual rate in nearly a decade, while the German economy grew just 0.1% in the third quarter. Both economies were successful in avoiding consecutive quarters of negative growth – the ‘technical’ definition of recession.

Trade traumas weigh

Published in mid-October, the International Monetary Funds (IMF) World Economic Outlook, outlined the global economy is growing at its slowest pace since the financial crisis. They downgraded the 2019 world growth forecast to 3.0%, a 0.3 percentage point reduction from the April estimate. The bi-annual Outlook cautioned that the self-inflicted wounds of the USChina trade war had created a ‘precarious’ economic situation.

Cautiously optimistic

The IMF predict that growth will pick up this year, forecasting that the world economy will expand by 3.4% in 2020. Global trade protectionism and geopolitical tensions remain primary risks to the outlook going forward. The estimated pickup reflects projected improvements in the economic performance in several markets, developed and emerging. Considering the uncertainty surrounding prospects for many of these countries and prominent risks, it is possible that a more subdued pace of global activity could emerge.

Pension Allowance Breaches Surge

HMRC data has revealed a significant increase in the total value of pension contributions exceeding the annual allowance, with more and more people falling foul of the complex rules and  regulations.

The latest personal pension statistics, which cover 2017/18, show a staggering 26,550 people reported contributions exceeding the £40,000 annual allowance in their self-assessment tax return, with combined total contributions amounting to £812m, an average of £30,584 per person. Furthermore, over the past decade, the number of individuals reporting such a breach has risen dramatically, with just 230 people facing similar tax charges in 2007/08 when the annual allowance was £225,000.

Pension complexity

The sharp rise in breaches can largely be blamed on a big reduction in the annual allowance in 2011 and the introduction of the tapered annual allowance in 2016, which added even greater complexity to the pension landscape. Indeed, unless government heeds industry advice and significantly simplifies allowance rules, the next few years are likely to see even more people caught out by the overly complex regime.

Here to help

As many people are discovering, a breach of allowances can be extremely costly. It’s therefore imperative to seek professional advice if you are unsure how pension allowances impact on you. And remember, we are always here to help.

 

Financial Resolutions For A Prosperous New Year

The New Year period is a common time for people to take stock of their finances and make resolutions designed to boost their financial wellbeing. And a new study has found the likelihood of success in this area is heavily linked to receiving professional advice and the establishment of clear financial objectives.

Advice is key to success

The recently released research1 actually provides a quantitative measure of the value attributed to advice when it comes to helping investors achieve their goals. The US study was based on real-life data relating to more than 100,000 advised investors and found that eight out of 10 with a defined retirement goal had at least an 80% greater probability of achieving their financial objectives. In
other words, advised investors typically hit 80% of their financial goals.

Create a financial plan

The research vividly demonstrates how taking expert advice and constructing a Financial resolutions for a prosperous New Year tailored plan can significantly boost an investor’s financial wellbeing. In many ways this is unsurprising, as the benefits associated with financial planning are wellknown and plentiful.

Financial wellbeing

Discussing your financial objectives with us enables you to consider exactly what you want to achieve with your assets and thereby establish clear goals that are both realistic and achievable.  Regular financial reviews provide opportunities to monitor progress and adapt plans where necessary. Good financial planning also ensures all investments are tax-efficient by minimising both current and future tax liabilities.

It’s good to talk

This study once again reiterates the significant value that can be gained from seeking professional financial advice. So, if your circumstances have changed or the New Year has encouraged you to refocus your financial objectives, then get in touch. That way you can be sure your financial goals remain realistic and you give yourself the best chance of turning any New Year financial resolutions into reality.

Source – Vanguard, September 2019