Should I switch back to Equities ?

Our recent communications since the outbreak of the Corona Virus have focused on how you can best protect your fund during these unprecedented times. For those who have switched into a lower risk portfolio or cash and deposit funds, our view has been that while there is nothing wrong with such an approach, it is nevertheless important to have a strategy or plan that will dictate when you switch back to your normal investment strategy.

The reason why it is important to have such a strategy is the need to remove the emotion from the decision. Evidence suggests that financial decisions based on emotion alone tend to be poor decisions. We believe it is important that you have a pre-determined plan to switch back into standard investments; otherwise rather than protecting your fund, you will run the risk of locking your loss in. We have previously discussed various methods that could be used to help you design your reinvestment plan, but in this email, we are going to focus on just one tool that may be useful – a continued upturn in the FTSE 100.

In recent weeks the FTSE 100 has shown signs of recovery, so we thought it was now important to discuss this index in more detail. In order to give as complete a picture as possible to all of our clients we may discuss some concepts that are obvious to you – so please bear with us. While when discussing performance we have to make it clear that nothing is guaranteed, we can in this email, discuss what has happened so far, and perhaps of more interest what will happen if the current trend continues.

So what is the FTSE 100 ?

It is an index of the top 100 companies in the UK and their share prices. It is not necessarily an indication of how other indices and funds will perform. As an example, there is no comparison between the FTSE 100 (which is exclusively based on the value of Stock and Shares) and a fund that only invests in property.

So why is the FTSE 100 potentially a good indicator of overall market performance ?

The biggest companies in the UK tend to also have significant business interests globally. These companies operate in areas that affect most people in their day to day life, such as food production and supply, building, banking, medicine, insurance, utilities, even pest control. The share price of these companies will rise and fall depending on how successful they are.

As an example, since the start of the lockdown, British Airways has cancelled the majority of its flights, while still having to find the expenditure to fund such an operation. This is significantly negative and will adversely affect the share price. At the start of 2020 the share price of International Consolidated Airlines (the company that owns British Airways) stood at 636.20. Today (10th June 2020) the price has fallen to 287.48. That is a loss of 55%. Hopefully as lockdown ends, travel bans will be lifted and the company will become viable again. If it does, it is reasonable to believe that the share price should rise. 

Therefore, given the mix of companies that make up the FTSE 100, it is a good (but not infallible) indicator of whether a recovery is taking place in the UK and possibly globally.

What has happened to the FTSE 100 in 2020 ?

To keep this section simple, we will round numbers up and down, as the overall principle is the point of interest in this report. This is perhaps a case of where a picture seems to tell the story !!

At the start of this year, the FTSE 100 was trading at above 7,500 points. At this stage Corona Virus was something that was happening overseas. Somewhere a long way away!

During January the value of the FTSE 100 actually increased. However during February, the value decreased and stayed just below the opening value at the start of the year. At this stage all deaths had been in China. The first death outside of China took place in the Philippines on 2nd February. By the end of February there were only 20 reported cases of Covid in the UK and nobody had died. At this stage the UK still seemed relatively safe, although European countries were reporting a larger number of cases. Nevertheless, by the end of February the FTSE 100 lost approximately 1,000 points to stand at 6,500 - a fall of 13%.

The first UK death was reported on 6th March. Although the number of reported cases rose, it isn’t until 23rd March that the UK announced a lockdown and 4 days later Boris Johnson tested positive for the virus. During this time the FTSE fell to its lowest point of 5,000 points (a 33% loss since the start of the year). Equally the FTSE 100 had a good 3 day rally with growth of 15% between the 24th and 26th March. In fact the 24th March nearly proved my prediction wrong (of not seeing more than 10% being gained in any one day) as growth of 9.05% was recorded. However the Prime Minister contracting the virus on 27th March brought this rally to an end and markets fell back again.

Since the low point in March the FTSE 100 grew in April and May and thus far in June it has also grown.

What does this mean for me and my pension fund?

Firstly, we hope this shows that the FTSE 100 may be a good benchmark on which to base your plan. So far there seems to be a good deal of synergy between the FTSE 100 index and how the corona virus has impacted on the UK. The darkest days of March are also reflected in the FTSE 100 performance. The early days of panic have gone to be replaced by stoic acceptance. Slowly as optimism has grown in the UK and the lockdown has been relaxed, then the value of the index has started to increase.

Of the 2,500 points lost between the start of the year and the last weeks of March, almost 1,500 have now been recovered. At the close of business yesterday (9th June) the FTSE 100 stood at 6335.72 – this is 15% higher than at the start of the lockdown. The markets are still 16% down on the figures at the start of the year. A further 1,200 points would need to be recovered to get us back to where the markets stood on 1st January 2020.

Is the recovery happening ?

The honest answer here has to be that we don’t know! - but as you will see, the FTSE 100 is heading in the right direction. If the markets do recover this year from their current position to the position at the start of the year, that will mean 16% growth between now and December. The question is – is now the right time for you to switch back into your normal investment options ? Obviously only you can answer that. Many will still be concerned about a second wave of the virus and there is clearly a concern among some that perhaps we are coming out of lockdown too soon and will have to do it all over again. We have no better idea than you.

If you look at the trend of the FTSE 100 (which is not guaranteed) then should the performance from April to today continue then the index would be back to the level it was at the start of the year by October. If you wait until the index is back to its start of year figure, then you would not have benefited from the recovery and you would have guaranteed your loss.  

Having said all of this, those who opted for ‘fixed interest’ funds (as opposed to standard ‘cash’ funds) may have done well. We have seen annualised growth of 8% to the year ending 31st March on the Royal London Fixed Interest Pension fund. This is also unusual and unexpected growth and a return that would satisfy most equity investors. However if things return to normal with this fund then you could expect 3.5%.   

It is important to remember that the purpose of email is, for those who have transferred into lower risk funds as a result of Covid, to remind them that they will need to review and decide when they should return to a normal investment strategy - ideally in a way that removes the emotion from the decision. If your decision was to reinvest once 2 months of continual growth has been achieved, then you are already beyond this point.

It is important that we state that we are not encouraging or recommending that people reinvest, or move out of cash, but rather we are reminding those who set themselves a FTSE 100 based reinvestment target that their target may now very well have been reached.

This page does not contain personal advice and recommendation based on your circumstances.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.