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Wow, what a week it has been on the political front. I can’t remember a time where there has been more uncertainty and volatility at Westminster greater than that witnessed in the stock market, but this is exactly what happened last week.
I shan’t go into the detail of what is happening with Brexit because you will have already heard it all about at least a thousand times. I will however say this – ‘Are you surprised?’
I mean surely, did anybody really think that this was going to be in an easy stroll in the park for us. Of course not. I regularly appear on CNBC Television and I get asked this question all of the time – ‘How will Brexit affect the stock markets?’ and my answer is always the same – it’s very bad news for equity prices; uncertainty always is, and there isn’t anything more uncertain than having an unstable Government whilst simultaneously entering the most difficult period of political turmoil since the end of the 2ndWorld War.
Dark clouds on the horizon
But don’t take my word for it. Look at the numbers and you will see for yourself the dark cloud that is now gathering above us all. One key indicator that analysts often look at is what industry is doing – are they afraid or confident?
Well, the manufacturing industry is now anticipated to reduce its capital expenditure on plant and machinery to its lowest level since the height of the financial crisis in 2008. And can we blame it? Why would any company invest at a time where so much is up in the air? Companies are beginning to disinvest, contract and pull back – that’s the start of an economic recession in anybody’s books.
And of course, right now, we are looking at a vote of ‘No Confidence’ in Theresa May, a potential leadership challenge, a new general election that could get Corbyn into power, possibly another referendum which would undermine the entire democratic process or indeed even the possibility of a ‘No-Brexit Deal’ which would disastrous in the short term. Forgive me for saying this, and unless I am being particular docile this morning, I just don’t see any happy outcomes.
US interest rate hike
Worse still and as we know, it never rains, it pours. Right now, the US is perilously close to raising interest rates, and that, in my humble opinion, will have very far and wide-reaching consequences for all investors. If the Federal Reserve raises rates by a quarter of percent next month, which is all but a done deal, and then raises a further whole one per cent in 2019, which is not quite a done deal but certainly one in progress, then say goodbye to your investment portfolios.
Seriously, if you think that the US raising interest rates by 1.25% in the current market climate won’t affect the value of your shares, then you are being unrealistically optimistic.
Why you should be wary
Let me give you just 2 reasons (there are many more) why you should be wary:
Number one – if you are like an average UK investor, you probably already hold a significant percentage of your total portfolio within the FTSE350 market, and right now that market is on red alert. Depending on what transpires out of Brexit over the coming weeks, we could see another 500 points wiped off the main market indices in a blink of an eye.
Number two – even if you don’t hold very much in the UK and you are patting yourself on the back because you anticipated the Brexit chaos and you have diversified overseas, then the chances are that you will have invested heavily either in global funds (including emerging markets) or in the US directly.
The problem with rising interest rates and how it impacts the US economy and the US stock market is obvious; it will put the brakes on the US economy and in the absence of the silver gun of ‘Quantitative Easing’ programme available to print easy money, this will slow investment and expenditure and encourage savings, which will be bad news for your US based funds.
Severe issue with Emerging Markets
The issue with the emerging markets is also severe. You see, a lot of investors have already tried diversifying in this area because it’s usually the ‘go-to’ asset class when interest rates are low. That’s because a low interest rate environment generally attracts investors to the emerging market arena like bees to a honey pot in search for that higher yield. However, when the music stops, the drops that we see in this high-risk market is always severe.
For example, did you know that so far this year the emerging markets have fallen on average by a shocking 18% (in sterling terms)! But it will get worse, of that I am quite certain, and I will tell you why. If interest rates go up in the States and there is such political instability and uncertainty in the UK and Europe, then there are very few places left to get a high return.
Nobody is looking at Asia right now and Japan isn’t the power house that it once was, so as big as this world might look, there doesn’t seem to be too many sensible investment options in equity plays right now.
Smart money will find its way into cash-based assets and fixed income bonds
This means that the smart money will start finding its way into cash-based assets and fixed income bonds (held to maturity). If you don’t share my level of pessimism then I would like you to cast your mind back to 1994-1996 when we saw massive falls in emerging market indices at almost exactly the time that the US hiked their interest rates.
There is an argument being thrown around by some analysts to suggest that because the market is already expecting Brexit to be bad and expecting the US to raise interest rates, that this news is now factored into the price of equities. Nonsense.
As human beings we have this innate ability of seeing things more positively than we should when it comes to investments. I don’t really know why that is, because in every other aspect of life, most people generally see the proverbial glass half empty and often expect the worst. But when it comes to investments and the stock market, suddenly the conversation turns to “Well, I’m a long-term investor, so I don’t really care about short term volatility” or “It will be alright, my share portfolio is well-diversified” or even “Things aren’t too bad, we will be ok”.
If I said any of these lines to my clients, I would be hung from the nearest lamppost. (No seriously, you have never met my clients). The point is that it’s ridiculous to assume that things are going to be okay. They are not – and the sooner we stop sugar coating what is actually happening and start taking affirmative action the better.
For those of you who read my articles you will know that this isn’t breaking news. In fact, I have been writing about this constantly every week and had to break from it only last week and talk about something else simply for my own sanity. But I’m back again this week because it’s the only thing that I can talk about!
There is money to be earned if you know where to look
But I will finish on this – it’s not all doom and gloom. Remember when the market throws a curve ball, there is plenty of money to be earned if you know where to look. The opportunities in the market place are plentiful because fear and greed are now taking over stock valuations, which means that there is going to be mis-pricing everywhere.
For example, with falling prices, some companies are now generating as much as 7% or even 8% dividend yields! That’s why right now at London Stone we are implementing two major strategies to reposition client portfolios in light of current market conditions:
- We are hedging and insuring portfolios – to protect against the now almost inevitable crash. This is the first thing that you need to do right now with your investments.
- Our clients still need to make money from their investments and the safest way to do this is through income yielding shares that take advantage of capital price volatility. There are different variations to this but our preferred choice is a strategy unique to London Stone which we call the Dividend Income Plus (DIP), which has generated good and consistent returns during times of turmoil.
Free online webinar
For those who want to know more about the DIP Strategy, I am holding a free online webinar on Wednesday 21stNovember at 7pm.
Spaces are limited and so if you want to reserve a place email my team firstname.lastname@example.org
Due to many requests, I will also shortly be holding a webinar on how to hedge your portfolio and will keep you posted about dates and times. Hopefully it will be before and not after the crash! If you can’t wait and think that you need my help in the meantime then you can contact me at the email address above.
Remember now is the time to take action!
I have had many enquiries from people who read my articles saying that they agree with me, that they are fearful of the market falling and that they want to protect their investments from a crash – with my help I am glad to say that some have restructured their portfolios and are now protected, whilst others are still undecided.
And that’s okay because my focus has to be on helping those who are sure that they want to help themselves. That may appear harsh but it has to be this way because right now time is running out. You will recall that I was expecting a major correction by the end of 2019, but after the events of last week I may have to recalibrate those dates.
Typically, we also get a Santa Claus rally at this time of year, and it could still come, but I am concerned that this is going to be a sad Christmas where Father Christmas bears no gifts at all. We shall see.
So, what’s it to be? – your choices are simple – either take preventative action today, or be prepared to regret your decision not to, tomorrow.
Hopefully I will see you on Wednesday.
London Stone Securities