There is no doubt about it – we are now in the second wave of the novel coronavirus. But what does that mean from a financial perspective?
Overseas markets have fared better
During the first wave of COVID-19, nobody foresaw what was going to happen. The effect it had on the economy, the stock market and jobs was utterly unprecedented and hit the UK hard. In fact, the UK took one of the most severe downturns compared to lots of the stock markets around the world. From its all-time high at the beginning of the year, it fell 35% during its worst point, and at the time of writing, we still have 20% to recover.
Overseas markets have fared better with the American, Japanese and German markets having recovered all of their losses already. What this teaches us is that over the last six months, the best performing portfolios all have a larger exposure to overseas investment funds. That’s where the money has been made, however there is nothing to suggest this trend would continue.
Many of the funds have even taken the falls in the market and still made a profit. Some of our riskier portfolios are higher today than they were six months ago due to the positive gain of their overseas exposure.
I talk more about overseas investment funds in my earlier blog ‘How to Beat The 2020 Stock Market‘, but it’s worth mentioning it again here when it comes to looking at the next 18 months now the second wave of the virus is here.
The unloved UK market
The truth is, the city sees the UK market today as being oversold and unloved. Part of the problem was the Brexit worry. It meant that over the last three years, new investment monies from Europe, that always came to London, stopped coming due to the uncertainty brought on by no trade deal.
And then the novel coronavirus hit.
The combination of these two factors has made it very difficult for the UK market to thrive and is the reason why it has the biggest deficit to recover of any major stock market.
But we shouldn’t just look at the impact of COVID-19 alone when it comes to the stock market. What I am hearing from fund managers is that there are things, not linked with COVID-19, that will arguably have a more significant, and far more long-term effects on the state of the markets.
Let us have a look at these now.
Elections, Brexit and a Vaccine
Firstly, the recent US presidential election. During any election period, there is always uncertainty in the markets and that has been the same for this one too. However, now that has been decided we may start to see the markets begin to stabilise again in the coming months.
The second thing is that we now know there is a COVID-19 vaccine. The recent announcement of successful trials by both Pfizer and Az brings hope that by next year there should be something ready for the mass market. Once the stock markets begin to see that coming into play, the uncertainty that COVID-19 brings to the markets may start to diminish.
The settling of the US election and knowing there is light at the end of the tunnel with COVID-19 may have two very positive effects on the UK market once uncertainty settles.
Another positive thing for the UK market is Brexit. Like it or not, on the 31st December 2020 the UK will leave the EU, deal or no deal. For better or worse, it means that the uncertainty brought on by Brexit may be taken away and the UK market will possibly begin getting some more love.
The UK market loved once again
So, what does this mean in terms of investment? Well, for a start, unlike the other major world markets, the UK market still has 20% to recover before it is back to where it was in February 2020. If we look at this from a financial point of view, this presents a great investment opportunity for the UK stock market.
With certainty restored by the recent US election, Brexit on 31st December 2020, AND a vaccine, we may see over the next 18 months some very nice recovery in the UK market. However, we still need to be careful as to where we decide to invest.
Recently the whole investment world has been turned on its head with traditional “safe” things, like oil and energy production, having a much more difficult time than ever before. We are now in a position where the largest companies in the UK are the more modern, more resilient companies which have been able to adapt to changing circumstances.
Loads of companies that were not traditionally “safe” have made a lot of money in the UK over the last six months. Look at technology companies, delivery companies, e-commerce companies. They have all thrived where other companies, with the wrong business model, have failed – so knowing which sector is going to come out on top of today’s market is vital.
2020 – getting in the market now
If you have investments or pensions and are concerned over the second wave of coronavirus, keep in mind that while it’s been the main focus in the news this year, the economy is not all about COVID-19. As I said earlier, there have been many companies who have prospered at this time.
The thing to remember is that stock markets HATE uncertainty. They hated the fact that they didn’t know who was going to win the political elections or whether there was going to be a Brexit deal, but come January 2021, that will all be over. We will know what happens to UK-EU borders and we will fully know the plans of Biden’s new democrat US government, which should mean more certainty will come back.
I would suggest that anybody who has money to invest should consider getting into the market now. Once the uncertainty has been removed, the markets may start to recover, and once they do, by waiting you may have missed any preferable bounce that the future holds.
History has proven that the stock markets have ALWAYS recovered. And the UK still has 20% left to go. I discuss market recovery in more detail in my blog, “How to Beat the 2020 Stock Market”.
Asset allocation with an independent adviser
So, keep in mind that although the second wave is and always was inevitable, there are still a lot of opportunities if you look in the right places. However, you must be discussing asset allocation with your independent financial adviser. It is the mixture of industry sector investments and geographical areas that will ultimately determine the success of your portfolio, so make sure you are working with a professional to get it right.
Do you invest in traditional property funds, or look for more modern infrastructure? These are questions that your independent adviser can help with, but whatever you choose, it is better to act now. History shows us if you miss the bounce of a stock market when it recovers, then you may never make the same return. Most of the gain in a stock market’s rise happens in that first bounce.
Be pragmatic, look at the second wave and the drop of the UK market as a great opportunity. The return of certainty and the recovery of the market is well on its way.
I hope this was useful. For more information, please feel free to email me at firstname.lastname@example.org or give us a call on 01270 626555.
More to come next week.
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article, or alternatively contact the Applewood Independent Ltd office on 01270 626555.
The value of an investment can go down as well as up. Past performance is not a guide to future performance.