The situation in Ukraine is horrendous and our support and sympathies go to all those being subjected to Mr Putin’s wholly unwarranted aggression. We had all been lulled into a sense of twenty-first century comfort, diplomacy and possibly complacency which suggested that such things in our civilised way of developed-world living could never happen again and yet it is.
It is only two years since the Pandemic created a market collapse which demanded nerves of steel. This is different but the ‘uncertainty’ created by the war there will reverberate and whilst the ‘hope’ was that the repercussions would be limited in financial terms, there are the beginnings of an underlying panic in certain areas. In headline terms, financially it is not so significant (depending on how it is defined) but there are various stocks, funds and sectors where already prices reflect worry we have not seen for some time.
Whilst impact on our assets is nothing like as severe as 2020, we are witnessing reluctance of marketmakers to hold stocks and their spreads between buying and selling prices are widening so sellers receive poorer value on disposals. They are also pushing prices lower in the face of sales of smaller companies and Trusts especially.
In the short-term (and not being mercenary in the face of this human tragedy) but the economic and financial impact is limited. Russia has been the third largest producer of oil. Its gas is crucial to the Continent and so prices have been rocketing as you cannot change supplier overnight for 10million barrels of oil a day either. The war will affect confidence and that will impact the global economy too and base commodities’ prices have been rising rapidly. That will feed through to the prices we pay in the shops. These factors could bring economic recovery to a juddering halt. This is fuelling a mini whirlwind of negative market reaction and panic in some areas. Clearly none of us knows how far and long this awful situation will ensue and the tragic consequences for so many there but the reality is that it cannot endure like this for long. However, whether the longer-term will result in permanent sanctions against Russia or defeat and removal of Mr Putin so ‘normality’ can return swiftly in relationship terms is anyone’s guess and too much optimism presently is misplaced – just as is too much pessimism.
The US and tech sectors had already begun to unravel as many of the investing public’s darlings had already taken something of a downturn well before the war began. We were devoid of these (such as Fundsmith, Scottish Mortgage and Lindsell Train). The US market (and its tech leaders) especially had been rising too fast and so falls there were not so unexpected. Of course, we ‘always’ suffer contagion to some extent. We have no direct exposure to these areas at all and very little through our collective funds. This volatility will continue for some time as each day’s news buffets or reassures markets or indeed it may be short as bargain hunters appreciate opportunity in value stocks and funds which will, of course, still be there through the other side. However, we must never forget that pessimism festers on the back of worry and uncertainty.
There has been a phenomenal recovery since the Pandemic lows but Mr Putin’s actions are damaging markets and volatile behaviour is having a devastating impact on stocks in Russia as well as overseas’ entities affected inadvertently by the sanctions, etc.
Mr Putin is also destroying Russia’s economic stability. That said, we had recently been profit-taking on several holdings to allocate funds to stocks still very depressed in value.
Investors can and do over-react significantly despite the ‘best’ emotional stance being to stay calm and buy cheap investments. We hold many ‘special opportunities’ too and which are less related to general conditions and the reasons for their ownership are unchanged. We also have some stocks which have risen in value in reaction to the troubles, covering energy sectors, defensives, mining (especially precious metals) and commodities like silver, wheat, uranium and agricultural products. However, these are not enough on their own to offset nervousness in other areas from financials to retail and holiday sectors to name but a few.
The UK market should in theory be more insulated, not only because it did not rise with the ‘rest’. Indeed the FTSE100 is below levels first seen in 1999, so less distance to ‘fall’ perhaps, especially as the underlying ‘value’ base is far steadier here. Our market is also more dominated by base commodity and energy businesses which have held their own and indeed advanced in value as well, in direct reaction to the conflict. However, that does hide the bigger losses in sectors which stand to lose from the war.
Many of our larger positions are steady but of course we are not immune. However, investors can over-react significantly despite the ‘best’ emotional stance being to stay calm and even to buy those cheap investments of yesterday which are likely to be even cheaper today, as those who chased things higher head for the exit. We also hold many ‘special opportunities’ and there have been some snippets of good news for some holdings too so it is not all negative though we’d be disingenuous if we suggested such gains outweighed losses. Our main defensive assets (as noted above) have also held steady.
The reaction appears overdone. Market makers are more jittery than normal and are writing-down prices of most shares and related funds, not wishing to hold anything overnight. It doesn’t matter what great story there was last week.
We have some things left to profit-take and indeed have a little silver and currency for some clients too (which have risen) and perhaps in due time we should take that money off the table to buy cheap holdings from depressed sellers keen to exit at any price. Ukraine is the ‘Breadbasket of the world’ and wheat prices have also rocketed and we hold some of that direct commodity too – it all helps counter the negativity.
Patience and time are crucial qualities in the face of such events. We have endured and ridden through these sorts of conditions many times before and have emerged stronger through the other side, with our best overall performance from the trough of the Pandemic since the Firm began in 1985. Many issues (not trying to dehumanise the tragedy in Eastern Europe now) are simply short-term ones which evaporate as quickly as they start. I am not here to alarm anyone nor to be flippant, nor to suggest any significant action on your part, unless you wish to take advantage of this fall to invest further capital in the markets for instance, though we shall be cautious with its use.
However, if you take a high level of income from your investments then perhaps considering reducing or postponing payments for a short time could benefit your strategy as the surplus can be used to reinvest. For all our clients, previously if we felt income withdrawals might be at an unsustainable level we would remind them of this fact in their ongoing reviews or by a separate letter but if they need that income, they can be assured we always know how to fund their needs and we aim to keep a reserve for a few months – this is part of our individual ongoing consideration we give all the time. However, if any client can trim their fixed monthly incomes a little for now to help capital values exponentially, they can email info@miltonpj.net or call Reception.
We encourage you to remain calm. Market volatility is not uncommon and is the reason we always demand investing for the longer term and holding a good level of cash reserves to meet short-term needs. In time, such events (which seem catastrophically significant now) will be seen as small corrections when viewed as part of the bigger financial picture and timeframe. However, this is not suggesting complacency either. We are giving our closest of attention to events as they develop (as we hope is your own adviser if it is not us) – as we always have given in such times.
I recognise the serious concerns which the ongoing uncertainty perpetuates. We are experienced and I have weathered many storms in my forty-four years in the financial world but we are not perfect and have no crystal ball but ultimately, things will settle and the global economy had bounced significantly since the Pandemic. We shall do the best we can throughout and you have our continued assurance on that.
At some point, a reality will prevail and the markets will regain poise and ‘normal’ stability. I cannot say when. I can reassure you that the income flows into our clients’ investments are remaining as solid as they have been and even if some stocks can sometimes reduce their payments, others will improve them (there have been far more increases of late than declines too). This year is predicted to be the largest ever, with energy companies and miners paying colossal sums to investors after a comparative hiatus for some years. Rio Tinto has just declared the biggest normal dividend for the whole UK market ever and we have some – and its shares have been rising during the conflict. Since the Pandemic trough, several of our cheap, ‘value’ stocks have been catching the eye of corporate predators and so we benefited from many take-overs, with the necessary premium received for things we have held for years in some cases. A few like G4S were bought-out at almost four times their lows and these special bonuses will continue for our clients – and another reason for us investing in these stocks in the first place and ‘that’s in for free’. More recently we have had Aggreko, Vectura, Morrison’s, PhotoMe and Stagecoach. Of course, not all clients nor their selected strategies have everything and newer clients only have our commentary and not the evidence yet, sadly.
As I have noted many times before, you and I shall continue to buy our groceries, put fuel in our cars and homes, use the electricity, water, telephones and mobile devices, use our pills, maintain our properties, clothe and house ourselves, engage our accountants, pay our insurance premia, do our banking and pay mortgage instalments and all the other bills we have and yes, we’ll continue to ‘enjoy’ ourselves and go on holiday too. We’ll still buy capital goods, from IT to cars and things for our homes and businesses. Commerce in all forms will survive, make profits and distribute some of those as dividends to their shareholders and pay interest on their loans.
Indeed, prudent companies and closed-ended investment funds will use the opportunity which a depressed stock price can present to use their own cash to buy-in and either hold their own shares to release for the future or even to cancel them, enhancing the returns for all the other shareholders. This proved very profitable for many companies during the pandemic’s financial panic.
It is easy to appreciate the fear that these conditions stimulate but actually recognising this in yourself and that a knee-jerk reaction is of no help can be the best way of tackling it. There is no point trusting the crowds, or the media which wasn’t suggesting these repercussions beforehand, nor the masses out there who have no professional guidance and no advice but they more easily convert fear into ‘sales’ and realise irrecoverable losses which they can’t replace and they never re-enter again (or certainly not till things have bounced much higher and when it is too late). We have seen it all before. It is true that the one thing we never learn from history is that people do not learn from history. The most expensive words too are ‘this time it is different’ – it is not.
It is very uncomfortable and stressful for us too of course. We have that onerous responsibility of doing our best for our clients, something which we truly understand and feel (clients of whom many are our friends and families) but our money is in exactly the same places and we have cares for clients, staff and the public generally. We shall not be panicking and neither shall we sit still without due cause but at the same time not forgetting that we invest in real businesses with which you and I trade every day and which pay incomes to us as investors. Indeed, we shall nibble-away at seriously depressed situations too, with cash reserves we have held and surplus income available for reinvestment. We encourage you to buy patience – not that we can guarantee peace overnight nor enhanced values into the future but it is not time to do the wrong thing.
We have done a number of things for our clients since this volatility started. We have issued urgent eshots to those on email. We are obliged to issue somewhat banal letters to any client whose account may have fallen by 10% since 5 January or more recent relationship commencement. We have written to all clients who had instructed withdrawals from their accounts and have suggested deferring them if at all possible, to ensure they do not take funds at a dangerous moment. We are writing to everyone on our database now because we believe it is the right thing to do and regardless of the cost to us, client or not. We are here to communicate with clients with concerns (but clearly it is impossible to speak with everyone).
So, if you were thinking of withdrawing from market holdings, can you defer that? If you are taking a hefty income, can you reduce or postpone that to give your account that special opportunity to acquire depressed assets instead for a while? If you need a withdrawal for bills, is it available from another (non-market) source so you could use that to postpone the withdrawal? Could you manage your immediate needs instead, by taking an income from investments so that the capital is not hurt by sales? Or, can you manage with a smaller sum now? All these options are possible given current turmoil.
If any investor forces sales in the face of a market which is not at all enthusiastic to buy from you, you will sell holdings at lower prices than those at which they should be valued and which you deserve. Sometimes even the sale of a stock can be enough to push prices down more, as the good and the bad face the same reluctance from market makers and buyers to do much other than sit on hands. Market makers are happier pushing prices lower even if in some holdings there is little activity. They make money on trading, up or down.
I do not share my comments glibly. However, we must rely upon our many decades’ experience and the fact that ultimately, economically things are not as bad as the emotions may suggest. Without wishing to be patronising but the best thing any of our clients can do is to trust our experience and longevity to do the best for them to weather this temporary storm and perhaps for them to put any correspondence in the bottom drawer and look at it again in a few months. Decisions must be yours because we cannot guarantee the future and how long you may need to wait for a bounce. It can be a very short time as volatility has a habit of being two-sided but that too is not trying to suggest naivety in the face of what Mr Putin is doing – or may do.
I reiterate that in our view it is not the time to panic and sell and indeed, there is real value appearing and from dull and in our view very safe sources. It doesn’t mean we should jump in with both feet but an alternative approach to one based on short-term panic is necessary. This could well prove to be an excellent time to buy and certainly not to sell, however uncomfortable it might seem presently.
And yes, we are sure that some clients will agree that the times of greatest pessimism are indeed the times to buy sensible-term opportunities and so if funds are sent to us for an ISA, Pension or portfolio, we assure you they will be subscribed very carefully indeed. If something was fair value at £1 and it is now 50p, you can buy twice as many for the same price and receive double the income you could have had – and you qualify for that into perpetuity. I only use that as an analogy – very few things on the market have fallen like that and for most the range is from several upward points to minus 20-35% (e.g. airlines/holiday firms, the very few stocks with Russian exposures) at most. Of course all Russian stocks have been decimated however and I have no idea what the future of the Russian market is for itself.
Where we know clients’ circumstances and communicate regularly with them about their flexible retirement strategies or other planned withdrawals of capital and income, or where we have agreed plans to move less tax efficient funds into their ISA or pension wrappers, nothing should have changed in terms of our ability to meet these specific arrangements we have made individually with them and for which further consideration will be given through ongoing reviews. When we know clients’ needs well enough in advance, we ‘cash build’ on accounts in advance and clients know we have accrued cash and that will have been before the upset in most cases, as our ongoing review letters tell them.
I hope that you find these comments helpful and genuinely based on fact and rational consideration and so to be reassuring to you in terms of the need for patience now and what you should or should not be doing at the present time. Meantime our prayers, compassion and practical and financial support must go to all the Ukrainian people.
My very best wishes
Yours sincerely
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers
