Matthew Feargrieve investment management and investing news blogsite

With interest rates falling to zero, and stock markets on the rebound, now is the time to invest in mutual funds, says investment management consultant MATTHEW FEARGRIEVE.

With governments and central banks around the world scrambling to limit the economic damage being caused by COVID-19 lockdowns, investors and savers worldwide are faced with the prospect of negative interest rates. In the United Kingdom, the Bank of England has refused  rule out negative interest rates, which in theory is a move designed to stimulate the economy. the Bank's monetary policy committee has decided to stick for the time being with a base rate of 0.1 per cent, but a further rate cut to zero or lower cannot be ruled out.

The idea behind negative rates is to get money flowing out of banks and into the economy in the form of loans and mortgages. Negative rates should encourage borrowing, while discouraging savings    

The prospect of negative rates should provide a further, final impetus for savers to reconsider hoarding all their spare cash in bank accounts that provide negligible or nil rewards and instead invest their money in stocks and shares. 

So what should savers do to counter the rewardless, close-to-zero interest rate environment that we currently find ourselves in?  

Don't worry about whether interest rates turn negative or not 

The Bank of England has already asked banks to report on their 'operational readiness' to deal with zero or negative interest rates. But there are differences of opinion as to whether negative rate will actually help the economy. Andrew Bailey, Governor of the Bank of England, has indicated that the Bank is still considering whether or not to impose negative rates. 

However, you should not worry a great deal about whether rates go negative or not. The fact of life at the moment is that rates are close to zero, and will not work their way upwards for some time to come. And so savers might as well act now. 

If you are holding large cash reserves, you should take the opportunity now to consider investing more. Think carefully about whether you have the right balance between cash savings and investments, and consider funnelling some cash that you are not likely to need over the medium term into investments that have the potential to deliver better returns than the pathetic rates of interest that the banks are offering. 

These investments can include corporate bonds, index-linked bonds, absolute return funds, real assets such as gold and infrastructure, and equities (also known as shares). We consider some of these investment products below. 

Research how markets are reacting to low or negative rates

If interest rates do turn negative, it would affect the value of assets in different ways. Holding cash would earn little reward and there is even a chance savers may have to pay to keep cash in the bank. Also, if negative rates drove down yields on Government bonds, investors might be tempted to seek riskier assets in the hope of a better return. 

Jason Hollands, a director at wealth manager Tilney, says those in search of a real return (one above inflation) from their savings would be 'pushed up the risk curve into corporate bonds and equities'. But he warns that the value of such assets would not be guaranteed and would fluctuate. 

McDermott also says negative rates would be a 'positive' for the value of gold. He says: 'Gold is a much safer store of value than cash at this point. Also, negative interest rates would mitigate the Achilles heel of gold – namely its inability to earn interest or produce an income. Suddenly a major disadvantage becomes an asset.' 

Research the investment funds that will benefit

Having weighed up how negative rates might impact your investment portfolio, the next step is to ensure you have the right investment funds. 

Investment funds (also called mutual funds) are collective investment vehicles which pool investors' money and then invest that money in stocks, shares and other financial products. Equity funds invest in stocks and shares (which are really the same thing) whilst bond funds invest in debt instruments that can be issued either by governments (gilts) or by companies (corporate bonds). There are other investment funds that invest in other things; for example, commodities like silver and gold, or alternative assets like Bitcoin and other cryptocurrencies.  

Some investment funds are riskier than others, and some are more expensive than others; remember that the manager of the fund will charge you an annual fee for managing the portfolio on your behalf. Your aim, in general, should be to invest in fund that delivers an index-beating or index-tracking return at a reasonable cost.

So your objective should be to identify fund managers who have delivered returns that have beaten or at least tracked the markets over the previous five year, with investment products that have an OCF (the "ongoing charges figure": broadly speaking the annual fee you pay the manager) of less than 1.00% per year (we think that any fee greater than 1.00% per year is too high). We divide them into two groups: actively managed investments and passive investments (index trackers). Actively managed funds charge you higher fees, often around 1.00% a year or more. Passive funds track a given index, and so their fees are lower.
You can read more about how to select investment funds here.

A good idea is to start with five investment funds offering good exposure to regions and also different types of funds. 

A global tracker or index fund offers geographical exposure at a competitive cost. A technology fund taps into the rise of tech titans, while an emerging markets fund gives you access to the growth in emerging economies.

You might also want a little exposure to a healthcare or biotech fund to back efforts to prevent a repeat of Covid-19. And a small exposure to a gold fund is a good hedge against inflation and volatility. You might even view Bitcoin as a safe-haven asset for 2021. You can read about gold and cryptocurrencies as safe-haven assets in our blog here. 

UK Shares are Cheap

UK stocks are cheap, so this a good time to invest. UK businesses are undervalued, and have a lot to offer.

The UK also has strong areas of growth, such as renewables. We have a big natural resource in offshore wind which is set to surge. 

But you will need to be quick. Economic stabilisers are on the horizon, like the covid vaccine and Brexit certainty, and these will hike the price of UK bluechip companies in the medium-term. You can read more about investing in the shares of UK companies in our blog here.    

Act your Age!

An important rule of thumb is that the older you are, the more you should put into safer assets (bonds). Younger people can afford to take more risk and have more invested in riskier assets (shares, also known as equities). 

For example, a 60 year old would have 60 per cent in bonds, 40 per cent in shares, and a 30 year old would have 30 per cent in bonds, 70 per cent in shares. 

Bear in mind also that you may well already be an investor without knowing it, if you have investments via a workplace pension. Through this investment you, and your employer, will be putting money each month into investment funds, which in turn invest in companies listed on stock markets.

It may seem boring, but it is important to spend a Sunday afternoon taking time to find out how much you have invested in your workplace pension scheme and crucially, the investment funds in which it is invested. With a little research, you may find that you are not overly impressed with the performance or the fees being charged by these funds; or both. Then you might wish to use fund supermarkets, like Fidelity or Hargreaves Lansdown, to pick your own investment fund and move your pension money into those.

Keep it Simple

Don't over-complicate things, or get too ambitious. While you might hear stories of the dramatic profits people have made from buying bitcoin, or day trading, these are complex and risky and, chances are, they don't crow too much about their losses.

Read up about the investments you're interested in and never buy anything you don't understand.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his blog here and his Twitter feed here.

  

 

As Joe Biden prepares to take the presidential reins from Donald Trump, investment expert MATTHEW FEARGRIEVE considers the implications of a Biden presidency for your investment portfolio and what action investors should be taking.

Leaving aside the fall-off of the S&P500 as Donald Trump’s current refusal to concede the election plays out (something that investors will need to keep a close eye on), it is axiomatic that when the US sneezes, the rest of the world catches a cold. And, whilst investors naturally keep an eye on the US as an economic bellwether, we should keep in mind that the US went into recession in February 2020 and has not officially re-emerged.   

The 2020 Election: What Didn’t Happen

First, what didn’t happen. The so-called Blue Sweep that some pundits had predicted, as Trump’s popularity appeared to wane in polls on the run-up to the election, did not materialise. Trump did significantly better than the markets had expected. History tells us that a Democrat in the White House enjoying a majority in both houses of Congress usually results in an initial market sell-off, averaging a 2.4% drop in the S&P 500 in November following a sweep, with a recovery in December averaging 3%.  

Over the past quarter century, when Democrats controlled the executive and legislative, the S&P500 rose an average of 9.8%, rallying three times in four after the election.

A Democratic sweep traditionally sees the renewable energy and industrials sectors benefitting from a new focus on infrastructure in Washington, while pharma (and, now, Big Tech) tend to dip on increased government regulation.

On the other hand, a Republican President presiding over a split Congress results in an average S&P500 gain of 5.3%, with stocks rallying following two in every three elections. And had Trump won, with Republicans holding the Senate and Democrats retaining control of the House, historical data tells us that the S&P500 would have enjoyed a short term rally of around 4% based on the election not having caused any earthquakes.

Far from the Blue Sweep, the Democrats managed to hold on to their majority in the House of Representatives but failed to wrest the four seats they needed to gain control of the Senate. There is a possibility that Democrats could win runoff races in Georgia leading to a deadlocked chamber, the more likely outcome is that the US will operate under a divided government.

And guess what? That’s not all bad news for your investment portfolio.  

What Will (Likely) Happen; and Why Capitalism is a Coward

At the time of writing, it looks likely that Biden win be declared winner by the Electoral College, but Republicans will retain control of the Senate.

Being blocked by the Senate, President Biden would be significantly hampered in his ability to legislate new policies, most obviously a regulatory crackdown on Big Tech. This scenario therefore sees a continuation of Donald Trump’s lenient corporate tax policy, the counterpart of which would be Biden’s more stable trade and international policy.

There is a broad consensus that the markets would favour such a state of gridlock (or status quo?), with historical data suggesting that the S&P500 rising by an average of 13.6% and rallying after the election. The VIX Index (or “Fear” index), which measures expected volatility in the US stock market, tailed off in the immediate aftermath of the election, having touched its highest levels since June in the run-up.

In short, the market rally that began when Biden started pulling ahead should be seen in the light, rather than as significant of any major policy departure that Biden may be able to pull off. Clearly, capitalism is a coward, and investors shouldn’t let themselves get carried away by any post-election buoyancy in the markets. What we should expect, probably, is more of the same. And as we said at the top of this blog, the US is still in recession.

What Can Biden Do?

One thing we can feel reasonably safe betting on is that President Biden will be tougher on COVID-19 than Donald Trump was. The market rally on news of the Pfizer vaccine has cooled somewhat, as the realities of its global implementation sink in, and the ability of the US to keep the virus in check will remain a key concern for the markets.

Nonetheless, cyclical stocks are leading the vaccine rally, and they would benefit greatly from a Biden-driven central bank response to reflating the US economy. Such a Federal policy-led stimulus, together with the likely downward trajectory of the greenback, suggests that US equities will fare a lot better than US bonds in 2021, although it has to be said that the prospect of a stimulus bill has been greeted by the markets, post-Election, as a broadly positive prospect for bonds as well as equities.

So what does Biden mean for my Portfolio?

Well, for a start, maybe a pivot towards US stocks and away from US debt instruments for 2021.  For this reason, we think that the traditional weighting of equities-to-bonds in the US section of your portfolio should be revised in favour of equities. If you don’t want to implement this yourself, a multi-asset investment fund can provide a convenient balance of equities and bonds with less risk than a fund investing only in equities. You can read more about this in our blog here.

After almost a year of coronavirus, growth stocks show no signs of losing pace over value stocks, the latter needing a sizeable economic fillip upwards for their re-emergence.

We think that, because of the policy inhibitors the Republicans will place on Biden, investors do not need to be overly wary of Tech stocks, but they should nonetheless keep in mind the combination of Big Tech’s high market power and low tax yield, which may prompt more regulatory action against stocks like Amazon, Google, Apple and Facebook.

One obvious corollary of a Biden presidency would be a broadening of your portfolio’s exposure to Healthcare, particularly given the Democrats’ promised reprisal of Obamacare. Speaking of Obama, his administration tried but made little inroads into the ability of Pharma to fix its own prices for its own drugs. Investors should not forget that the US population is an ageing one.  

Bank stocks are cheap right now, and we think the markets are overly bearish about them, for the reasons just mentioned. We think that there will likely be an across-the-board resurgence in prices following Year End reports, and certainly by the time of Biden’s inauguration in January 2021.

Infrastructure should do well under a Biden administration, being a sector historically favoured by the Democrats.  Biden has pledged to spend US$1.7 trillion in order to turn the US by 2050 into a fully clean-energy economy, with net-zero emissions.

Companies with a play in “low carbon” should also be kept under surveillance by investors during Biden’s first term. Regulations are increasingly more likely across economies outside the US to reduce the energy demands powering infrastructure. This will similarly create opportunities for companies in this space.      

In conclusion

We have explained in this blog how President Biden will face some real inhibitors from the Republican-held Senate on his ability to implement serious policy change. As we have seen, the markets are already responding favourably to this state of semi-deadlock (some would call it a continuation of the status quo in the US).

In our view, investors would do well to similarly react in a measured way, both to the Trump-Biden transitional process and thereafter to Biden’s first term. His presidency at the moment poses measurable and relatively low-impact risks that will, because of Republican blockers, take time to evolve, giving investors opportunity to adjust their portfolio accordingly.

Investors will likely find themselves implementing this strategy in a time of buoyant US equities, which are set for a healthy 2021 if the incoming POTUS is able to get to grips with COVID-19 in the US and manages to reflate the US economy with a programme of centralized fiscal stimulus.

Matthew Feargrieve is an investment consultant. You can read more about him here.

        

Disclaimer: the views expressed in this blog are the author’s personal views only, and nothing in this article is intended to be financial advice.