Market briefing – 1st July 2020
The global outbreak of Covid-19 looks to be continuing unabated, with Europe seeming to be the only continent where the rate of transmission is slowing. Governments have changed from national to locally directed restrictions, while central banks take stock to decide how better to refine their additional monetary policy responses.
With six months to go, Brexit talks between the EU and UK negotiators resumed, aiming to reach some consensus and common ground on any proposed trade agreement.
London stocks were virtually unchanged in early Wednesday (1st July) trading amid ongoing concerns about the coronavirus pandemic, as investors eyed the latest assessment on the UK economy. Investors appear to be caught in two minds; 1) optimism about a continued improvement in economic data and 2) caution over the prospect that any second wave could push out any recovery well into next year.
Keep calm, smart diversify and stay the course
Bull and bear markets are a fact of life when investing. When markets seem to be on a continuous upward cycle, it’s easy to lose sight that that they may fall; equally, when markets begin to fall, it’s common to feel that their only direction is downwards.
As the chart shows…
Source: FE Analytics (1)
… £10,000 (red arrow) invested in the MSCI World Index (2) would have seen an investors capital rising to a total return of over £31,100 (blue arrow) over the last ten years; a reasonable time period for any investment. This graph is illustrative only, as this index isn’t a fund and therefore isn’t carrying the performance drag of fund management fees.
The moral of the story is: those who have ridden out market falls have been rewarded for their perseverance with returns that can often make up for the preceding losses.
That being said, bear markets are tough and emotionally challenging, as the graph above highlights when looking at the recent falls in February and March. But it’s also tough missing out on the bull markets; as again the graph above shows. In fact, a client investing at the top of the market on 17th February – the green arrow – would only be just over 4% down, even considering the bear market at the end of February and early March; a recovery of just over 28% in 3 months.
What the MSCI World Index also shows, is that geographical diversification is an essential part in smart diversification. Even though the MSCI World Index has 1,637 constituents across 23 developed market (DM) countries, over 65% of its exposure is US based; for example, 9 of the 10 largest holdings are US companies.
On the other hand, investing in an index such as the FTSE 100 (3), shows how the lack of diversification impacts. As the graph below shows …
Source: FE Analytics (1)
… the same £10,000 invested in the FTSE 100 would have grown to just under £18,500 on a total return basis; over £12,000 less than the World Index. Again, this graph is illustrative as this index isn’t a fund and therefore as before, isn’t carrying the performance drag of fund management fees.
What this should tell you
That investors should continue to keep calm and smart diversify; not only across different countries, but also across different asset types, such as bonds, equities, etc., across different investment styles, such as active management and passive investing, and across different investment philosophies, such as growth and value.
As shown above, individual stock markets will continue to go up and down, whereas smart diversification across assets, styles and philosophies can help investors minimise risk as defined by volatility.
Although it does not guarantee against loss of capital, full diversification is the most important component of reaching long- range financial goals whilst minimising risk.
However, remember that no matter how smartly a portfolio is diversified across different asset types, investment styles and philosophies, risk and reward do typically go hand in hand and as such risk can never be eliminated completely.
It is true that the short-term horizon and focus discussed here enhances the uncertainty due to the unpredictability of this current situation. However, it is important to remember that we very often have a long-term investment time horizon to match our planning objectives and goals.
As we have said before, we will continue to monitor the current financial situation and keep you notified of any changes that are made. Please seek professional financial advice if you wish to discuss your financial situation further.
(1) FE Analytics
(2) The MSCI World Index is an index that was created by MSCI Inc. and represents the performance of small- to large-cap stocks from 23 developed and 24 emerging markets. It is used as a benchmark to compare performance and gauge overall global stock market strength or weakness – https://www.investopedia.com/terms/m/msci-acwi.asp
(3) FTSE 100 Total Return Index – measures the total return of the underlying FTSE 100 index, combining both capital performance and income –
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