Monthly Market Blueprint: Why Financial Planning Matters

Fri 09 Oct 2020

Covid-19 comes at the back of 11 years of sluggish growth, rock-bottom interest rates but absence of inflation,  negative global capital investment, manifest income inequality, stagnant wages and low consumer confidence levels, often dubbed “Secular Stagnation”. It is more of an understatement to say that these pressures were “greatly exacerbated” by the pandemic, and probably more accurate to say that the additional strain of the worst quarter for economic output since the end of World War II brings significant dangers to the stability of the global economic and financial systems.

If growth acceleration was a difficult proposition before February 2020, with both left-wing and populist mercantilist approaches having virtually no positive effect on local or global growth, the pandemic renders 5% sustainable growth for developed economies a very low probability event.

With growth projected to be sluggish for a long time and the Fed doing its best to resuscitate inflation, in a bid to prevent the vicious cycle of deflation, our investment committee felt that we need to be realistic about where we can get growth for our portfolios. It means we have to lower fund charges. This quarter, we will be replacing some regional exposures for a much cheaper global index fund, without compromising alpha sources. I means we need to stay diversified, despite very low bond yields. It also means working harder, so in the next few months we can meaningfully reduce UK home bias in our portfolios, while still taking into account the fact that our clients are Sterling-based. Improvements like these are marginal, but without great growth, we can only work on the margins to improve performance. It’s a lot of hard work, on a lot of small things, the sum of which might just make the difference between a growing and a stale portfolio.

As for financial planning? Sluggish economic growth eventually will mean sluggish investment growth,  which means that income from allowances must be maximized. We must thus navigate through laws as efficiently as possible, with no room for error. In a world where the state is bound to have a heavier hand than in the past, where less free markets will mean less growth, lower ROICs, more zombie-companies and more state intervention, it means this is the exact time when a call with a financial planner is warranted.