In Focus: Summer 2020

In Focus | Summer Edition | July 2020

<big>In Focus

<big><b>Your quarterly financial planning newsletter</b> Summer edition | July 2020

Welcome

Welcome to the summer edition of In Focus: discover our latest insights into financial planning, pensions, retirement and more

Welcome

In Focus | Summer Edition | July 2020

Welcome to the latest edition of In Focus, your quarterly financial planning newsletter.

As we edge out of lockdown, we're exploring the immediate impact of COVID-19 on the economy and a range of investments, including property and savings. We'll also be be analysing the longer-term impact of the virus on retirement planning and pensions.

We hope you’re staying safe and well, and look forward to seeing many of you in person again soon.

And of course, if there’s anything financial you’d like to discuss with us please get in touch - we’d love to hear from you.

Best wishes,
Pete Selby
Managing Director, Retail Advice

What has been the economic impact of COVID-19?

Should I buy now?

Has early retirement been delayed?

Should I be investing now?

What has been the economic impact of COVID-19?

The possible implications for your wealth and household finances

What has been the economic impact of COVID-19?

Many people are aware that COVID-19 has disrupted the UK and global economies. Yet how exactly have these been affected? Is there any long-term damage and what are the possible implications for your wealth and household finances?

These are hugely important questions and much of the dust is still settling from the first quarter (Q1) of 2020, allowing the picture to become clearer as time passes and more economic data becomes available.

In this article, our financial advisers here at Punter Southall Aspire offer some thoughts on this crucial topic as things currently stand in June 2020. We'll be looking at:

COVID-19 and the economy
COVID-19 and investments
The oil price
COVID-19 and property

COVID-19 and pensions
COVID-19 and savings
Implications for financial planning

COVID-19 and the economy

To say that the economic cost of COVID-19 is bad would be an understatement. Whilst the lockdown and measures of the budget in March were arguably very necessary, the impact upon the nation’s balance sheet and economic outlook are enormous. First of all, public borrowing has increased dramatically to pay for the government new handouts from March such as the Job Retention Scheme, in addition to a £30bn stimulus and £600bn of infrastructure spending over the next five years. As a result, the Office for Budget Responsibility (OBR) has forecast that the UK budget deficit will increase to £300bn this year. The implications are quite serious. At some point, somebody is going to have to pick up the bill. This is why many commentators are anticipating possible tax rises later in 2020 to help rebalance the UK economy.

COVID-19 and investments

A stock market fall does not necessarily spell economic trouble for a country. Yet in 2020, the economic instability caused by COVID-19 and the UK lockdown have been accompanied by dramatic falls in global equity markets. Both EasyJet and Carnival Cruise line have lost their place in the FTSE 100 following a huge collapse in their share price. Markets across the world have been highly volatile, with the S&P 500 and Dow Jones indices witnessing their worst day in March 2020 since the October 1987 stock market crash. Presently in June 2020, the markets are slowly rising again as lockdown measures start to be eased across the developed world. It is unclear at this stage whether this rise will continue. Much depends on whether a “second wave” of COVID-19 transpires and how a possible vaccine is developed.

The oil price

Whilst all of this was happening in Q1, U.S. oil prices turned into negative territory for the first time in history on the 20th of April 2020. As COVID-19 spread across the world and shut down global supply chains, demand for oil plummeted. This is likely to mean a sustained, lower price of oil for customers at the petrol pump in the coming months. Yet it also spells bad news for large energy companies and other businesses which feature in many important index funds.

COVID-19 and property

In April 2020 property website Zoopla reported that 400,000 residential property sales were put on hold by social distancing measures, totalling £82bn. At the same time, 18 large UK property funds made the decision to become suspended - effectively “trapping” investors' inside them. However, movement is slowly reappearing in the UK property market in June 2020, with house viewings and valuations restarting. The impact of COVID-19 and the lockdown on UK property prices is still unclear, although the current consensus is that values are likely to go down in 2020 and possibly 2021.

COVID-19 and pensions

As markets reeled in Q1 in response to the pandemic so did many defined contribution pensions which held equity investments. Different pension-holders will have been affected to varying degrees depending on their asset allocation, but according to Unbiased it could take 5-10 years for many defined contribution pensions to recover from the damage caused by COVID-19.

COVID-19 and savings

Here, fortunately, there is a bit more good news. The Financial Services Compensation Scheme (FSCS) remains in place, guaranteeing up to £85,000 of your savings if an authorised financial firm were to fail. Cash savings and investments will not be affected by the 2020 stock market volatility, although already-meagre returns will likely be worsened by the Bank of England(BoE) lowering the base rate to 0.1%.

Implications for financial planning

This just scratches the surface of how COVID-19 has affected these and other important areas of the markets, economy and personal finances. The important question, of course, is how all of this affects your wealth and household income. Here, it is a good idea to review your financial plan with your financial adviser to check whether the situation merits any necessary changes.

For the moment, here are some important questions to ask yourself:

Are you properly diversified? Holding too much capital in one type of asset, company or sector leaves your portfolio exposed to unnecessary risk. Make sure you speak to your adviser about your current level of diversification in light of the current environment, your goals and investment horizon. Read our latest investment article for an outline of the key questions investors should be asking themselves right now.
When are you planning to retire? As mentioned above, the pandemic has eroded the value of many pension pots and this might affect your retirement date and lifestyle. Once again, please consult your adviser if you are at all concerned. Our article "Has early retirement been delayed?" expands on this further.
Is your protection plan up to date? If you suddenly lost your main source of household income due to serious injury or ill health, do you have the right protection policies in place to help keep your family afloat financially? Our guide, 'Protection When It Matters' outlines the different types of protection available to you.
Have you checked your estate plan? If you have not yet got a solid estate plan, a Will or Lasting Power of Attorney in place, now might be a good time to consider these. You guide to estate planning can be found here.

If you have questions about any of the issues covered here, and the potential impact on your financial plans, please get in touch with one of our advisers. We would be happy to help guide you.

Should I buy now?

The housing market landscape

Should I buy now?

Many people are wondering what may happen to UK house prices as we edge out of lockdown.

There are even those claiming to know exactly what will happen in the 2020 summer months and beyond.

Here at Punter Southall Aspire we wanted to offer you the latest data and extrapolations to help inform your thoughts - especially if you are a prospective first-time buyer or looking to remortgage for a better deal.

Should buyers wait since prices might be about to go down? What about those looking to sell; is it best to sell while the housing market is still open? After all, if a second wave of COVID-19 comes to the UK, that could bring things to a standstill again.

Here, we’ll be examining some of the factors that drive house prices and looking at these with specific reference to what’s going on in the housing market in the second quarter of 2020.

House price growth & compression: six forces

Generally speaking, there are three main forces which encourage house price growth in many developed economies like the UK:

Interest rates
Houses are usually bought with mortgages, so the first force is interest rates. If these are low, then house prices tend to be higher.

Demand for housing
A second force is demand for housing: the higher the demand, the higher prices usually are.

Wage growth

Finally, wage growth is crucial given the sizable deposits and monthly mortgage payments involved with buying a home. When wages are going up in a certain area this is usually correlated with house price growth.

Conversely, there are also forces which usually push house prices down:

High inflation

High inflation is one of them, since this drives up the prices of goods and services - leaving less to spend on housing.

High housing supply

Another is high housing supply, which gives buyers more power to drive asking prices down.

Affordability

A final important factor is affordability. If prices are simply too high for most people to afford, then this tends to compress house prices.

All of this leaves the question: where are we at the moment regarding these forces on the UK housing market, as the country moves to some semblance of “normality” in July 2020? What are the implications, moreover, for buyers and sellers? We offer some answers to those questions overleaf.

Now that the lockdown is starting to lift, data sources are starting to shed more light upon the state of the UK property market.

The housing market landscape

What does the data show regarding UK house prices in 2020 and in recent years? According to The UK House Price Index (HPI), the current data only extends from January to March and shows average house prices for all property types falling slightly from £233,027 to £231,855.

Of course, this does not capture effects of the lockdown from mid-March until June 2020 (the time of writing), and there is a reason for that. Following the Government’s effective shutdown of the housing market in March 2020, so few house sales took place in this period that the Office for National Statistics has been unable to accurately track average UK house prices. Now that the lockdown is starting to lift, however, other data sources are starting to shed more light upon the state of the UK property market.

At the moment, two big factors influencing UK house prices are unemployment and economic growth. Historically, UK house prices have tended to fall dramatically during a recession such as 1973–1975 and 2008-2009 when prices fell, on average, by -12% and -15%, respectively.

The deeper and longer the recession the more house prices have fallen. The big question, of course, is whether the UK is currently in a recession or about to enter one.

Whilst we cannot know for sure in June 2020, according to the Bank of England, the likelihood is that the UK is already in a recession. Unemployment, moreover, is expected to peak around 10% before starting to fall in 2022. NIESR also projects that world GDP will contract by 3.5% in 2020 before growing by 7% in 2021.

This would be a considerably bigger fall in GDP compared to the 2008-9 Financial Crisis, where house prices fell by about 15%. In other words, house prices in 2020 could fall more than they did in 2008-9.

Whilst we cannot know for sure, according to the Bank of England, the likelihood is that the UK is already in a recession.

Implications for buyers and sellers

It’s important to stress that these forecasts are not iron-clad, and there is a considerable margin of error which means things could turn out differently. However, there are risks which might even make the situation worse such as COVID-19 becoming more virulent, policy measures being withdrawn too quickly and the economic implications of Brexit. There are positive forces in the more immediate term, conversely, which may help to stablise UK house prices. Interest rates are being kept low, for instance, and the government is helping banks to expand their lending. If measures such as these help keep the financial system stable, then people are more likely to go out and buy a home.

What does this all add up to for buyers and sellers?

There are still many unknowns about the current and future state of the wider UK economy, as well as its housing market. However, it does appear that house prices will face considerable downward pressure for some time as we move out of lockdown. A “second wave” is uncertain, yet could bring the market to a standstill once again if social isolation measures are re-imposed.

As always, the decision to buy or sell a house will need to be judged on an individual basis with your financial adviser, taking into account your distinct financial goals and circumstances.

Read our Guide to Buying a Home for more information on borrowing money, paying a deposit, extra costs and more.

Has early retirement been delayed?

The impact of COVID-19 on retirement planning

Has early retirement been delayed?

With the global market falls and turbulence seen in 2020 following the outbreak of COVID-19, many pension funds have followed the stock market on its downward trajectory. In the first quarter, the pandemic inflicted the third worst week on the British stock market in history, leading 350 pension funds to fall by 25% with some even falling by as much as 50%.

Whilst many indices seem to be rallying at the time of writing (as the UK edges out of lockdown), much uncertainty still hangs over the UK economy and the equities underpinning many people’s retirement savings.

What if there is a second wave of COVID-19, for instance, which leads to another lockdown and disruption in economic activity? Until a vaccine is discovered, much remains unknown on this front.

All of this has important implications, of course, for retirement planning.

Is early retirement still a viable and desirable option at this time? Would it be wiser to postpone retirement until the wider situation has stabilised? Our financial planners here at Punter Southall Aspire turn their attention to these important questions here.

Is early retirement still a viable and desirable option at this time?

The impact of COVID-19 upon DC pensions

Whilst retirement lifestyles in the UK are not always mainly funded by pensions (e.g. property income may be important for some), the majority of them are. COVID-19 and the UK lockdown, is leading many people to rightly reconsider their retirement planning.

Some may still be able to retire early as planned. Others may need to think about delaying their plans or taking a lower yearly income in retirement than originally planned.

The impact of COVID-19 upon pensions has been considerable. Those nearest to retirement will likely have been most shielded from the market volatility, since much of their portfolio will probably be in “low-risk” assets such as cash and bonds.

For those in their forties and fifties who hoped to retire early within the next 5 years, however, questions will be hanging over whether or not this will still be possible. Many of these individuals are likely to have a high level of exposure to equities in their portfolios, which have taken a considerable beating in 2020.

The FTSE 100, for instance, took a huge dive in March (similar to other leading indices) after the announcement of lockdown measures, leading to its worst day of performance since 1987.

As shown below, the index has been on its way up since April, yet it is still to reach the value it achieved in late December 2018. As a result of this, those with a defined contribution pension which are likely to be invested in these kinds of indices will have seen a big hit to their long term savings in 2020. Indeed, in the first quarter the average pension fund value fell by 15.2%.

COVID-19 and other pensions

Those thinking about early retirement will likely not plan on relying upon the state pension in the initial years. After all, income from your state pension only arrives in your account if you claim it once you reach your state pension age, which from October 2020 will be 66 for both men and women. Nonetheless, the state pension will almost certainly play an important role in providing an income in your later years of retirement.

The good news is that the stock market volatility of 2020 has not changed the value of anyone’s weekly state pension. The potential bad news, on the other hand, is that the state pension is a costly government expense which could be in the Treasury’s firing line to help rebalance the UK economy. Reports are starting to emerge that the “triple lock” system underpinning the value of the state pension could be scrapped in an attempt to save billions. If this transpires, it will have considerable implications for all retirement planning, not just those looking to retire early.

For those with a defined benefit pension, here your employer promises to pay you a fixed yearly income in retirement. As such, the 2020 stock market volatility is unlikely to directly affect this pension.

However, those looking to retire early need to check at which age their scheme is willing to start paying benefits.

The good news is that the stock market volatility of 2020 has not changed the value of anyone’s weekly state pension.

It might be that you need to rely on other, defined contribution pensions in the initial years of early retirement, and these have been hit by stock market volatility. Moreover, many employers themselves have had their revenues badly hit by the loss in customer purchases due to the pandemic, casting uncertainty over their futures. If the company promising your pension goes down, then this raises significant questions to raise with your financial adviser about the implications for your pension planning.

Should I wait?

Many people in the media are arguing that early retirement is no longer a plausible option in 2020. As financial advisers we need to stress that each person’s case needs to be judged upon its own merits, and it is unwise to make blanket statements about early retirement. For certain, many people may need to delay their early retirement plans until their investments start to recover, but it’s also true that many people who were approaching their planned retirement date had already moved to a much more “defensive” portfolio before the outbreak and lockdown started. As such, these individuals might still have substantial savings which could still be used to implement a viable early retirement plan.

The crucial point, however, is that those hoping to retire in the coming years review their plan with a professional financial adviser, to ensure that everything is still on track and to check whether any sensible adjustments are required.

Each person's case is unique - those hoping to retire in the coming years should review their plan with a professional financial adviser.

Should I be investing now?

Important questions for investors to consider

Should I be investing now?

In many of our advisers’ conversations with clients this year one question has recurred (for those in a position to do so): Should I be investing now?

New and seasoned investors will likely be troubled by the behaviour of global stock markets so far in 2020, but there is another way to look at the decline and volatility we’ve seen: it could be seen as a buying opportunity to people who are yet to start investing for the first time, or those who have large cash holdings.

With equity markets selling off there may well be bargains still on the table ready for the taking, yet there are important questions to address for first-time investors (and as always, you should remember that markets are unpredictable and could well swing back again).

How do you know when shares are, in fact, “on the cheap” (i.e. valuation)? Moreover, what implications does the present market environment have for a long-term investment strategy? Should you go “all in” now with your investments before equities get more expensive with future market recovery, or is there another approach which better mitigates your risk?

The present moment might be a buying opportunity to people who are yet to start investing for the first time, or those who have large cash holdings.

Making valuations

When it comes to looking at the present situation of the global markets in 2020, it’s important to take a step back and look at the bigger picture of equity growth.

Here is a snapshot of the S&P 500 between 1980 and the time of writing (8th June 2020):

What does this graph show? In short, it highlights how - despite short-term dips in performance - the S&P 500 has grown significantly in value over the last 40 years. So, whilst the recent sell-off since March 2020 is worrying for investors, when seen in the bigger picture it does not seem so frightening. This reinforces one of the central arguments of financial planners such as ours here at Punter Southall Aspire: investors should choose an appropriate asset-allocation strategy for their needs, goals and risk profile and stick with this for the long-term. Despite any falls in future market performance, a patient investor can reasonably expect their portfolio to grow over many years (although as always you should note that this is not guaranteed, and past performance should not be relied upon as a guide to future outcomes).

However, whilst predicting future market performance is nearly impossible it is sensible to ask what factors drive equity prices. After all, if it is possible to make fairly accurate valuations of equity prices, then it becomes more possible to determine whether they have fallen enough to be regarded as “cheap”. Here, there are a number of factors at play but perhaps the most vital one is real earnings growth (i.e. the profit generated by companies). As such, when you have a period of strong real earnings growth you also tend to see equity price growth. Similarly, when earnings fall (e.g. during a recession) then equity prices also usually decline as more of a company’s profits get diverted into keeping it afloat.

Of course, there are thousands of equity price drivers. Yet real earnings growth is undoubtedly a key one. The question, therefore, is how to regard the overall fall in equity prices seen in the first quarter (Q1) of 2020. Leading up to this period were prices rising faster than earnings, meaning that we’re currently seeing some kind of “correction” where prices more accurately reflect the value of the main indices (e.g. the S&P 500)? Or are we witnessing a genuine “bargain period” of equity de-rating in 2020, thus presenting opportunities for new investors to buy at good valuation levels?

2020 is as good a time as any other for an individual to start an investment plan, provided they are committed to a long-term strategy which is appropriately diversified.

Insights & implications

Unfortunately, answering those two questions is exceedingly difficult due to data limitations and different models for measurement and forecasting.

Here comes the science part: according to FactSet, for instance, over the last 20 years the S&P 500 hit its low-point following the 2008-9 Financial Crisis at 8.5x forward earnings. Since 2011, their data shows that much of the growth can be attributed to re-rating upwards (i.e. people were paying more for each dollar of earnings). The average forward PE (profits to earnings ratio) over the past two decades has been about 15.5x. This suggests that, despite the recent fall in equity prices, so far they are not as cheap as they were in 2009. Yet based on a 10-year average PE ratio, in March 2020 prices were just below “fair value” (you may want to talk through what this means in real terms with your financial adviser - click here to contact us).

The key question in light of all of this, of course, is what these market movements mean for investors and their portfolios. Is it time to move assets from equities into “safe havens” such as cash and bonds? Should investors buy more equities in anticipation of a stock market rally now that lockdown measures are starting to lift and economic activity seems to be restarting? Here, it’s important to note that many of these questions ultimately amount to whether or not it is wise to “time the market”.

In other words, should you take money out of the markets because you expect them to fall, or is it better to put more money in because you expect them to rise?

The evidence, however, overwhelmingly shows that it is better for investors to spend time “in the markets” rather than trying to “time them”. As mentioned earlier, there are thousands of factors that impact equity prices and it is difficult to accurately measure and predict real earnings growth in real-time. This suggests that 2020 is as good a time as any other for an individual to start an investment plan, provided they are committed to a long-term strategy which is appropriately diversified. The markets may fall further in 2020 if, for instance, a second wave of COVID-19 hits countries like the UK and leads to another slowdown in economic activity. Or, perhaps a vaccine is found and world economic growth becomes better than expected.

New investors should recognise that history suggests the short-term volatility of 2020 sits within a bigger picture of long-term market growth, and should not lead someone to abandon the markets. Rather, if you’re in a position to do so, now could be a great time to start investing for your future.*

*Please note this is not intended as individual advice as circumstances will vary. You should always seek professional advice.

The evidence overwhelmingly shows that it is better for investors to spend time “in the markets” rather than trying to “time them”.