As the pandemic spreads economic chaos across the globe what should investors be doing? Roddy Kohn has some advice.
As soon as I was asked to write an article about the outlook for stock markets I laughed as I remembered a quote for Lao Tzu: “Those who have knowledge don’t predict. Those who predict don’t have knowledge.”
So I have to point out that there are no predictions in this article. Many of you reading this know there are so many scholarly and not so scholarly articles out there that it’s overwhelming.
In truth, most predictions being made now will prove to be wrong, because the data governments and economists rely on just isn’t there. Of course I’m not saying there isn’t any data, simply that it’s like a Yo-yo toy. One minute forecasts talk about unemployment being X millions and the next it’s Y millions. What we know is no matter the quantum, none of it is good news.
In addition, we ought to remind ourselves of that other handy expression ‘rubbish in, rubbish out’.
So as investors I can tell you exactly what to do and even what not to do without making a single attempt at a forecast. And here is the golden nugget I normally keep for our special clients: stop trying to work out what’s going to happen next. Even Bill Gates (God bless him and his foundation) found that when you do make a correct and accurate prediction it will be largely ignored.
On the other hand, I can tell you some things we know. Brace yourself. It makes for uncomfortable reading.
The first is to be wary of the idea that economic recovery will be quick. Investors, whether that be in property or equities, have been used to high rental income/dividends. The suspension of dividends, whether enforced by government (as in the banks) or just because companies have, in the past, sought to attract investors seeking income by paying out too much of their profits and leaving little in the kitty for nasty times like these, says a lot. It says such dividends are gone for a long while yet. Property investors are no better off. The Finance Foundation reports an 8% rise in buy-to-let repossessions. Worse is to come. Tenants will defer then default on rents, and too many landlords are highly leveraged at just the wrong time.
So where should investors look? First and foremost, let me say that it pays to take advice at times like these. What’s more, all those DIY platform investors who have lost their savings are not protected. The failure of property investment fund London Capital & Finance saw investors lose over 100 million pounds
Investors who take advice are protected, and while it typically will cost you £500 more each year for that advice and protection you can expect to also receive important tax planning and wealth management advice to meet individual circumstances.
In the short term we expect deflation. Why? Because oil prices are low and economic activity has come to an almost virtual halt. This means the speed at which money changes hands in the economy is slow for now. However, as inflation has two components – supply and speed (velocity or M2 to the aficionados ) – things will change. Governments around the world have printed so much money (supply) that you can expect inflation to rear its head when that supply speeds up around the globe (velocity).
When that happens you can expect assets such as inflation-linked bonds and gold to play their part. Just remember, if you had a portfolio of gold you wouldn’t have any income. Gold is highly speculative but it is also well manipulated by a few key and dominant market players. In the US, adverts abound explaining how your hard-earned savings are being inflated away. They are not telling those same investors that buying gold from those organisations has a premium of 15-20 % in the form of spreads.
Tip number two is to look for companies that have the capacity to weather these storms. Inevitably these are digital companies and those with high moats. The type of business that has strong balance sheets and good cash flows, good management and a product we actually need or want.
Common sense really, but trust me, the data available to investors is not that great. Company directors lie – or should I say obfuscate – and decide with clever words and even cleverer forecasts. The big accountancy firms have too much work and religiously fail investors with their accounting manipulation, while the decent independents go to the wall because regulators continuously squeeze them for ever bigger fees while they are struggling to meet the excessive regulatory demands they face.
• Roddy Kohn MSc (Finance) is a chartered member of the Securities Institute and Managing Director of KohnCougar