Client Update & Market Commentary

With recent and ongoing events relating to the financial markets & Covid-19, Michael Garvey provides clients of Glasgow Wealth with our current approach and thinking…

“Everyone has a plan until they get punched in the face”

Mike Tyson

Ten weeks into a new decade and the year has already made its mark in the history books for all the wrong reasons.

Equity markets are down hard and likely have further to fall as matters get worse before they improve. To date, slow and clumsy government response has inhibited the containment and mitigation efforts put forward by our brighter minds.

Ahead of the Health Minister’s diagnosis with Covid-19, the irresponsibility of the Prime Minister appearing at Twickenham together with 81,521 other people in order to reassure us all can barely be articulated. As witnessed with Brexit, leadership and representation are phenomena absent from the political sphere.

With this in mind, following our recent portfolio rebalances and ahead of the tax year-end, now is as good a time as any to provide a client update.

Markets & Portfolio Positioning


In your portfolio rebalance exercise in 2019, it was clear even then that markets were running ‘hot’ globally if not locally (due to Brexit pressures). Equity valuations were too high based on various metrics, such as the cyclically-adjusted price/ earnings ratio (see chart below).

We moved 10-20% into cash depending on your risk mandate despite some idiosyncratic client resistance. At that time, the Bank of England base rate was 0.75% and so (after fees) we bought into a situation of guaranteed loss. This cost us in the short term as markets continued to rise. However, this rationale has ultimately been vindicated and it remains that as markets turn and the risk components of portfolios fall in value, we have a healthy weighting in cash representing significantly more (in percentage terms at least) than the 10-20% cash that we started with. Thus, we have a stock of dry powder to enter into the ‘on-risk’ portfolio at prices representing better than fair value. When will that be? Not yet, for established portfolios.

Also, please bear in mind that when the time comes to invest cash at hand, you may not want to for the same reasons that we met resistance when moving our most adventurous investors 20% into cash: sentiment. Specifically, fear and greed (the only real drivers of buying and selling risk assets). New investment monies either side of tax year-end and investments made with us in the last 12 months will continue to be phased into portfolios recommended and take advantage of volatile unit prices to average out market risk.


Bonds are best thought of as debt, lent either to companies or sovereign states. Debt was the problem in 2008/’09 and similar corporate recklessness is evident once more. Again, in our 2019 rebalance, we significantly reduced our exposure to corporate bonds and in the latest exercise, we moved to a position of very strong bias to highly-rated (AAA & AA) government bonds. This has been useful as Flybe’s creditors found out last week. Their Chief Executive cited Covid-19 as the over-arching reason for their demise with no mention made of the unsustainable debt on their balance sheet.

We have seen this time and again recently – Debenhams, Mothercare, BHS, Carillion, Toys R Us et al. These so-called zombie firms are held afloat by the availability of covenant-light leverage at the lowest rates in a century and yet they cannot remain solvent as irresponsible investment banks continue to proffer their clients’ money. There are more names that could fall in the coming weeks and this sector is best avoided altogether for now.

Inflation is the nemesis of bond investors and its return is certainly something that we should be alert to moving forward

My contention for the medium term is that it is difficult to see any scenario that does not feature a return of significant inflation which has been posted missing for some time now.

To date, state largesse in the form of quantitative easing has served the inflation of asset prices only. From here, it should be expected that price inflation comes online across the spectrum and not just for loo rolls and hand sanitiser. Inflation is the nemesis of bond investors and its return is certainly something that we should be alert to moving forward.

By extension of this point, if we do not see meaningful inflation arrive, the omnipresent public deficit our political leaders have been running care-free will become the mammoth in the room in the fullness of time in addition to their burgeoning unfunded liabilities.


Domestically, the UK stock market was already keenly-priced due to downward pressures from Brexit since the referendum. Now, valuations are even more appealing with the FTSE currently at levels first seen in March 1998. However, further market disruption remains a significant risk and from a timing point of view, there may be more selling pressure if recession wins out and the few prudent savers who made provision for such a scenario, need access to their savings. So better opportunity may yet present for a market entry. There will be plenty of opportunity for upside and investment at such levels will probably predicate a return to home-bias for equity investment. Globally, valuations are now much fairer than they have been in recent years but likewise, may have further to fall ahead of putting idle cash to work.

Alternative Investment

Gold/ Silver: We have always carried some exposure to precious metals in order to enhance diversification and serve as a hedge against inflation. This strategy has done fairly well until our latest rebalance when we switched risk-taking investors from the passive physical metal ownership into a more active play with miners who would stand to benefit from a surge in metal prices. This has not been effective so far as mining shares have been indiscriminately sold in the wider sell-off of shares generally. As a result, this sector now represents even better value and is something we will likely look to add to in the coming weeks. One Phyrric victory has been that in order to purchase mining stocks, we sold out of energy stocks ahead of the Saudi/ Russian spat (not due to any prophetic wisdom, I hasten to add).

Infrastructure: On the expectation of further government stimulus involving some form of spending announcement in the Budget and continuing commitment by governments globally, our infrastructure positions were retained and, in some cases, enhanced.

Private Equity: Continues to offer some diversification away from listed instruments and also – importantly – yield for income investors that has been hard to come by lately. It has thus been retained so far but similar yields are starting to look attractive elsewhere.

Commercial Property: Following the referendum and Brexit negotiations since, significant foreign investment in UK commercial property was withdrawn. This has brought values down and driven yields up. However, in a macro sell-off such as we have seen, property has been no safe haven. In recent years, the instruments containing the best quality commercial property with the most reliable cash-flows have traded at a significant premium to net asset value. If asset values fall any further, there may be opportunity to get into the assets we have had on our watch list for two or three years at fair value. Suffice to say, we will be alive to this opportunity should it present itself.


Usually, when we meet to review your investments, we do not profile your portfolio against the FTSE100 index. We ordinarily benchmark against a typical portfolio with a similar risk mandate to your own and/ or inflation depending on your subjective circumstances. The chart below however, does because – for reasons best known to someone else – this is what the mainstream media will use as a proxy for overall market health. That is, to demonstrate how your investments are holding up versus the mania we are being ‘informed’ of. It really does not help the man in the street make decisions, but likely shifts failing tabloids from newsagent shelves. The chart demonstrates the movement in our portfolios (after fees) since the last rebalance exercise we went through and so captures the entire decline since. The upshot here is that your investment portfolios are behaving exactly as we would expect in such conditions.

I am acutely aware that it is very cold consolation to present your current portfolio positioning with a ‘look, you have lost less than other investors’ stance. That is not my intent. The salient point here is that we are long-term investors looking to take advantage of short-term noise.

Furthermore, we are not the advice firm who run for the hills when the going gets tough. Taking a snap-shot at a time like this keeps us honest and hopefully goes some way to communicating how we respectfully treat your assets which I appreciate may sometimes feel like a dark art. The chart below captures how our moderately positioned portfolio has performed over 5 years versus its benchmark and the FTSE 100.

However, when profiling the longer-term, the chart below shows the performance of the market (B in the graph above) that we hope to continue to out-perform; including the ‘credit crunch’ and the ‘dot-com bust’ i.e. the last times the sky was meant to be fall down. That is, in pursuit of returns ahead of inflation, the volatility of risk assets must be borne in order to carve out meaningful long-term returns.

Plenty of economic headwinds remain. That European issue we were all talking about last year hasn’t really disappeared. There has not been occasion in the last 50 years where something seismic is not happening in the Middle East. 2020 will also be the year of a US Presidential election. Following the largest one-day slide in the history of the Dow Jones Industrial Average (-11.4%), the index saw a sharp relief on Friday of last week (+9.6%). Given the circumstances, the following tweet from yesterday was perhaps a little disingenuous.

President Trump’s opponents for his potential second term are offering free healthcare in addition to many more radical monetary give-aways (remember the terms helicopter money and Modern Monetary Theory for future reference). POTUS would do well to keep the philosophy of his trade war adversaries at hand as he continues to fumble his response to the outbreak. 

“A sick man wants only one thing; a healthy man wants a thousand things.”


When autumn draws near, we will further assess the impact the various permutations could have. ‘Et tu, Brute!’

As noted, further fiscal and monetary stimulus are prospectively very much to the fore in the thinking of Central Banks. Arguably, quantitative easing caused the financial side of problem we now face. Unelected global Central Bankers have had more than adequate opportunity to unwind the various stimuli used to sedate market volatility since the last recession. Interest rates decreases were not reversed and quantitative easing continued with a sense of gay abandon benefiting the very wealthiest in society (the so-called one percent) while encouraging debt and punishing savers with interest rates at what should be emergency levels for over a decade. Thus, the usual tools at their disposal are now limited; interest rates would have to go negative (at least in real terms, if not nominal) in order to achieve the same impact.

This may seem preposterous, but is already a reality in many economies; more fuel to the inflation fire. It will also be our prompt to exit from government bond funds which are otherwise uninvestible over the medium term with yields as they are.

Part of our main rationale for not selling down our invested equity holdings into the panic is a belief that further money printing is not too far away. If it happens, it is less likely this time that government bonds will be purchased exclusively. If further monetary injection is applied, it would have to be vast in order to be effective.

If the going gets tougher – and at this stage recession looks inevitable in my view – it is perhaps wise to have a look at what that might mean in the markets. The S&P500 in the US remains the best bellwether of global stock markets in my opinion.

Study of previous drawdowns in market history gives rich information that can be used to gauge market entry/ exit. However, no-one rings a bell at the top or bottom of the market. We will continue to search for value where it can be found.

Covid-19 Preparedness

By virtue of the nature and location of our business, we have many clients who work in the oil industry or are otherwise overseas. Reviews are often conducted by Skype (preferably as the screen-share function is handy) or FaceTime. Our staff are also busy parents who we don’t expect to be in the office Monday to Friday 9 ‘til 5. That is, we often conduct business remotely or at evenings or weekends when life gets in the way. Our telephone system moved to VoIP some years ago and so our Advisers and Administrators can all plug and play from wherever they have adequate broadband. Escalation to a full lock-down should not cause too much interruption to our day-to-day business activities beyond post and having documents signed. If you have not already done so, please register for our online portal in order that we may securely share information with you timeously and without reliance on the postal system; please email for a link to register. We would ask for some understanding of background noise if schools close! We also have adequate stocks of toilet paper and hand sanitiser you will be delighted to hear.

Tax planning ahead of year end

Tax structuring and further funding of investments ahead of 5th April remains distinct from our investment management piece. For those who have not yet made the most of their current rates, reliefs and allowances, we will continue to work towards the end of the fiscal period (and the commencement of the next) with this in mind, as usual.

Other observations

If you have significant savings on deposit earning very little interest and inflation does take off, you will be losing money in real terms. It is the perfect time to redeem expensive unsecured debt if funds allow.

Furthermore, if you carry a mortgage balance, it is likely that firstly you will be able to lock in a better deal over the coming months. Secondly, an offset mortgage can be a very potent tool to reduce the term of your mortgage. All of these things will put some distance between your income and expenditure if you can afford to do so… never waste a good crisis! That said, please ensure that you maintain a healthy cash position; usually 6-12 months of fixed monthly expenditure ahead of any of the above.

Humanity has faced larger challenges what we now see before us, economic and otherwise.

Glasgow Wealth is a young firm and like Iron Mike we will roll with the punches. This, however, is not our first rodeo. All client-facing staff have worked through the financial crisis twelve long years ago.

The aftermath of the dot-com bubble was my own baptism of fire in the industry and all that came with it; the Equitable Life scandal jumps to mind. Recessions are normal over the long term unfortunately. In general terms, I am mindful that our typical client is generally longer in the tooth… we are not here to patronise you. My role in our relationship is not that of reassurance in order to protect assets under management; I am content for that to be the position of our competitors.

Humanity has faced larger challenges what we now see before us, economic and otherwise. Not to belittle what is already a human tragedy, but resilience and entrepreneurial spirit will prevail.

When it does steady hands will see the benefit in their investment accounts. If the economic pain comes at the front-end of the decade, we could yet have our own Roaring ‘20s without the havoc of 1929 in wait.

It is not different this time – this too shall pass.

Michael Garvey

Principal, Glasgow Wealth Limited

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