Perspective


Dear Friend

PERSPECTIVE

PRIVATE RENTING AS AN INVESTMENT

BUILDING SOCIETY INTEREST

RISK WARNING

Despite some awful days’ trading already, yesterday has been the worst so far.  It was horrendous.  It is imperative to update you further on our thoughts at this stage.

The oil price collapse was the final straw, bringing oil stocks down as a consequence and not a few pence but big percentage figures like BP over 20%.  It is not ‘just’ those fortunate enough to be investors too but people’s pensions, insurances and all connected things and it affects all forms of confidence – and that affects you whether you think you are ‘invested’ or not.

As well as the fears, the problem is that being confined to quarantine = no travel or work and so oil consumption has fallen and OPEC has been unable to agree a deal with Russia to cut production so the price collapsed overnight.  The fact this ‘thing’ could be pretty-much over in say three months’ time is irrelevant in terms of the ‘now’.  The savings which will be seen by oil consumers (such as airlines) will be little consolation too and it will affect green energy investments too as carbon fuels will be so much cheaper than they were.  Texas Crude was already cheap enough at $43 but it fell to under $30 – the biggest one day drop since after the Gulf War.  Fair value in my book is $70 a barrel.

Consequently, the Dow and all other markets plummeted, especially as energy stocks still make-up such large amounts of the indices.  Tracker funds will have been hit harder than some active strategies as a consequence.  We shall hope that governments and central banks will intervene decisively to draw a line under the current levels so some stability can return.  The Coronavirus is bad enough to deal with on its own.  Our Budget is on Wednesday but whether that changes anything, I don’t know.  It might temper any thoughts the Chancellor had of cash extraction from the economy I suppose.  Are there any bright spots on the markets?  Very few indeed and who would want to own government bonds with minus yields or US Treasury bills at less than 0.5%?  It hasn’t happened yet but a colossal day of reckoning will be there for bonds generally.  Cash, currency and gold are worth a premium but these would never feature as main strategy elements for anyone in ‘normal’ conditions as they are poor substitutes for preferable investments then.

We have now sent a letter to everyone on our database trying to add some rational reason to the stance we believe that they should take with their investments.  It is easy to say ‘don’t panic’ but seriously you must heed that counsel and if you must, stop looking at values and put papers in a drawer and look at them when this virus is past history.  If you are an investor, I hope that you do not need access to any capital at the moment as it is a poor time to be taking it.  We are here to guide you on whatever options you have if you do have a need but do all you can to avoid crystallising losses that you can never recover.

At the time of writing, the FTSE is at a level it first hit in March 1998 – twenty-two years ago.  It hit 3,541 in March 2009 at the depths of the financial crisis and has since seen a new peak of 7,903 in May 2018.  Below 6,000, all things taken into consideration, is ludicrous at the moment, especially as the UK market never rose in line with say the US because of uncertainties over ‘Brexit’ of course.

Remember too that with savage sell-offs, some of the biggest ever daily increases have happened not long after.  That is no guarantee this will happen again but the same forces which exaggerate declines work in reverse and those who have exited miss that imperative recovery.

PERSPECTIVE

I was reminded of the Restaurant Critic’s comments in “Ratatouille” (my favourite film).    What he said was ‘what we need is a little perspective’.  That is what we need now.  Economically this virus is being viewed worse than had a world war been announced and because people can now react so easily with markets then extreme value consequences occur.

We were in London last weekend.  The numbers of people around and about doing their normal things were just as many.  The Tube was as busy on Sunday.  There was no sense of panic, few masks and still few cases.  There will be more and the government will announce more and more precautions.  No one wants any deaths but if 100,000 is our final quantity, that is hardly any in percentage terms however sad it is for even one.  Would many of these victims have passed-away from other health issues or other ‘flu infections regardless?  If the population is 67million now, it will still be 67million after the virus is past history, just as all such viruses have become such previously including The Spanish ‘flu which killed more people over fifteen months from 1918 than all those who died in WWI.  They had no way of doing anything about it then – we know what to do now.

We must be vigilant and do our bit to avoid spreading the disease and certainly where vulnerable people are concerned – those with existing conditions and especially those affecting lungs, heart, diabetes and so on.  If we are healthy, even if we contract it, the likelihood of complications are so slim anyway.  Children and babies are not susceptible as their immune systems are not as advanced enough to hinder their recovery. Those who have had it recover totally and can function as if nothing has happened to them.

Please be sensible – be aware, be cautions and wise but don’t act as if the world is about to end – it is not.

PRIVATE RENTING AS AN INVESTMENT

Some interesting statistics have just been revealed.  Apparently 250,000 private landlords have left the market in the last two years.  In 2009, there were 3,476,000 rental homes and in 2019 the figure had risen to 5,134,000 (down slightly on 2017).

There are now 2.66million landlords now, down 8% from the peak though there is a move for landlords to own more properties each.  It is an investment, often ‘geared’ (meaning you borrow to invest so hope to make return on the borrowed money too) but when more and more of the programmes on ‘Tenants form hell’ appear, I can understand why plenty of people don’t want anything to do with the sector at all.  Yes, there are some awful landlords too but if something goes wrong with the tenancy, then the law and conditions are stacked against the landlord and usually there is little merit in resorting to the courts as you are throwing good money after bad.  It is a shame as there are millions of great tenants and landlords but the bad eggs discolour it for everyone and sadly rents are higher than otherwise they would have to be because of covering the failings and arrears of the bad tenants.

BUILDING SOCIETY INTEREST

So the Britannia Building Society has written to me in regard to my token account I have there (and I am not singling-them-out as they are all similar).  It tells me that if I have £20,000 on the account instead of interest of £30 for the year I must now expect £18.  Yes, that’s not every week or every month but once a year.

Now some would say ‘it’s a risk’ but if instead I took that £20,000 and taking the opportunity of the present savaging as a consequence of the coronavirus and threw it at the FTSE100 Share index (so I buy ‘all’ the biggest shares on the main UK stock market, representing circa 80% of the value of the whole market), the ‘interest’ I shall receive in a year (the dividends from all the components) should be around £1,000.  That is fifty-five times more payment than from the Building Society.

So what that your capital will gyrate in value and it will fall too, especially in the short-term till you start to build some fat (in time it will rise even if only because of inflation, economic growth and the simple fact that companies keep reserves and thus their capital values grow as a consequence).  Just think though, the income should also rise every year (not necessarily in a straight line but because companies have to make a little more profit just to stand still and distribute a little more to shareholders as a consequence).  Well, that’s the theory anyway – there is a bit more to it than that but that is the principle.  During the last several big market downturns, whilst some companies and sectors had to cut dividends, others took-up the slack and so on global markets, the income paid away carried on rising, to be the biggest ever annual sum last year.

Look at it another way.  Even ignoring income on the income, if the income was ‘only’ £1,000 every year, in twenty years you would have built-up another £20,000 whereas the Building Society would take you 1,111 years to do that or would have given you £378 in total instead.

Well, I wouldn’t recommend you bought the FTSE100 alone anyway – you’d be best served buying our ‘Balanced Portfolio’ which is a very wide spread of loads of different global funds including defensive assets too.  It’ll be less volatile, cost you a management fee but will be the shrewd way of subscribing and hey, if you want the income to spend, we can even give you a regulated amount every month – say £75 on that same level of investment as a projection going forwards and to leave some slack?  Do that ‘execution only’ too without our ‘advice’ and there is no fee to subscribe.

RISK WARNING

Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.

To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!

If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website www.miltonpj.net. We celebrate our 35th anniversary in 2020 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.

Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.

My best wishes

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