A lockdown of over a quarter of the world’s population has been sprung upon us. Access to everyday essentials like food and space has been severely limited, with government decree that people are to only leave their homes once a day.
Naturally, a seismic event like this has impacted everything in its path, leaving no individual or business spared. Since mid-February, we’ve seen lots of investors withdraw from investments in response to COVID-19, creating even further pressure on thousands of start-ups and scaleups across all sectors. Sadly, more will be applied in the coming months due to the movement limitations impacting any travel, tourism or hospitality businesses.
It’s going to be a difficult few months for many, but one of the best ways to mitigate risk is to invest further whether this is in time or money. Sales and the financial runway have undoubtedly taken a hit, resulting in the need to protect your asset. A quick bridging loan or purchasing some additional capital might solidify a venture at this time.
By simply spending any spare time you have with their executive team, you can help to guide them through these challenges, ensuring a solid return on your investment in the future and placing yourself at the front of the queue for their next financing round once the company returns to health.
This is clearly a very worrying period but even in these conditions, we, at Seedlegals, have seen many reasons for optimism for both businesses and investors.
Firstly, there are many companies which are now literally saving lives. Those in online healthcare, manufacturing and even fitness apps are helping to keep the country moving. The UK is one of the most obese nations in the world today and helping those to keep as active as possible is a very necessary service.
Sales and the financial runway have undoubtedly taken a hit, resulting in the need to protect your asset. A quick bridging loan or purchasing some additional capital might solidify a venture at this time.
These businesses will be placed under more strain than ever before, none more so than food delivery services like Deliveroo, Uber Eats and many of their smaller competitors. Prime Minister Johnson called on the British public to use these as much as possible, which naturally will do wonders for their valuations but will require significant investment to keep pace, grow and develop as required.
Therein lies the opportunity for investment, which otherwise would unlikely have become available. The opportunity to support these businesses, both financially and with experience, could make all the difference to keeping the population well cared for and supported as long as required.
This challenging time will also shine a light on certain sectors that otherwise would not have seen much attention. In the past three years, somewhat surprisingly, no individual sector has seen significantly more investment than another. SeedLegals data has been fairly consistent with investors being agnostic to the industry they back. Now, however, we think it’s likely that MedTech, EdTech and social impact start-ups, as well as the others already mentioned, will see more attention than their peers, at least in the short term.
Of course, as is always advisable, diversifying one’s strategy is key at this time. As we’ve already seen, which is likely to continue for the rest of the calendar year, global markets will see a lot of turbulence. Certain technologies will fall in and out of favour, as well as companies. Ensuring you are backing a plethora of innovative firms should ensure your capital is as well protected as possible.
A number of investors will have been scared out of the market following the recent troubles but most advisers would suggest that we are now in the perfect time to invest. Companies need support and their valuations are likely less than before, moving the relative price and opportunity balance in favour of the investor.
Another shift could see the change in relationships between investors. One thing I’ve long been surprised about is the lack of venture capital and angel “chatter”. Every hour of every day we see founders speaking with their contemporaries about problems, issues, solutions and suggestions. Now, I appreciate that most of the time these would not be competitors, whereas on the investment side of the table if you were to give a tip to someone, they could attempt to steal your lunch money. With the global challenges upon us, a tighter knit investor community will hopefully emerge, especially in the high-growth tech sector which can only be a good thing for all concerned.
Ensuring you are backing a plethora of innovative firms should ensure your capital is as well protected as possible.
Staying on this theme, I genuinely believe that the best way to mitigate risk at this difficult time is for everyone to work together. If there is more of an open dialogue then an individual’s concerns or worries could be allayed, leading to increased investment in our society bringing us back to growth. And if you’re concerned about your level of contribution, there are many options around top-up investments to provide enough support to back any company whilst reserving the right to hold back some cash at this time.
It is no surprise that investors are being extra cautious about their money, and rightly so. However, the value proposition for the large majority of companies is still there and in most cases, the leadership team hasn’t changed. The opportunity is still ripe, the founders are still passionate, if not more so, but we just need to help this haze pass by getting involved now, before it’s too late. This will be the best way to break the virus’ hold on our economy.
This is the message from Nigel Green, the chief executive and founder of deVere Group, as G-7 finance ministers and central bank officials are due to hold a teleconference to discuss the issue on Tuesday.
US Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell will lead a conference call taking place before Wall Street opens. Bank of Japan Governor Haruhiko Kuroda and European Central Bank President Christine Lagarde are also on the call, amongst others.
Mr Green notes: “For many, the joint statement will not go far enough, and there will be doubts about the effectiveness. This disappointment will dampen the market reaction somewhat.
“However, in general, the markets are looking for a reason to return to being bullish – which has been their default position for an unusually long time.
“This teleconference between G-7 finance ministers and central bankers will likely provide some of the reassurance they seek.”
He continues: “Many investors will be seeking to buy ahead of any potential measures aimed at cushioning the coronavirus blow kicking in, in order to take advantage of the current lower entry points and, therefore, the opportunities, while reducing risk at the same time.”
Last week, the deVere CEO said: “Until such time as governments pump liquidity into the markets, markets will be jittery triggering sell-offs.”
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Mr Green affirms: “It was billed as ‘the worst global market sell-off since the 2008 crash’ but it then became an important buying-opportunity for many investors.
“Now, with a more coordinated international response in the pipeline, many investors can be expected to jump off the sidelines again.”
Previously, he noted: “In the current volatile environment, investors - including myself - will be revising their portfolios and drip-feeding new money into the market.”
The deVere CEO concludes: “Central banks and finance ministers of the G7 discussing an action plan to take on the far-reaching impact of coronavirus will buoy investors.
“Many will be seeking to increase their exposure to the markets ahead of the implementation of any measures that are rolled out as a result of this conversation.”
There are no right or wrong choices, but there are some that are more helpful than others. Take the time to figure out exactly what you want your investor to be like, take the necessary steps to prepare, and then approach your goals with intent and purpose that go beyond the pursuit of financial backing.
To discuss the two main avenues of securing investment for an SME, we’ve taken a look at the operations of Buxeros Capital, a public and private social impact investment fund, and used its methods of securing investment for up and coming start-ups in the emerging markets landscape as an example of good practice in finding the right investor for you.
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Private Equity Funds
Private equity funds are investment firms that operate outside of the public stock exchange and arrange transaction-based investments on behalf of investors and private firms looking for investment. They are the gateway to securing longer-term more cash heavy individual investors that are willing to take a risk with your business and deliver cash on the back of a promise that they will see returns within a certain time frame.
Buxeros is a both public and private equity fund that does this, however in order to approach a more niche investment sphere, it secures funding for small to medium enterprises that specifically aim to have a positive impact on local economies within emerging markets. The Buxeros team, like other private equity firms you might find, includes private equity veterans, seasoned entrepreneurs and strong partners in each region across the globe. One of its largest partners is Ramphastos Investments, an investment firm owned by Marcel Boekhoorn. This means that combined with its partners, Buxeros has the professional expertise, contacts and know-how you will need to not only secure investment but secure the right investment.
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One recent investment deal that Buxeros struck was with Profort, a business that provides orthopaedic care for people who need prosthetics or other low-cost limb treatment in Colombia and neighbouring developing countries. The firm is set to launch its first branch in Tunja this year and has secured the funds necessary to expand into other decentralised areas that will need and benefit from their services. Without an investment fund to help Profort reach the correct local contacts and without the specificity of Buxeros’ client remit to have a positive impact on local economies, this may have not been possible, which goes to emphasize how necessary it is to find investors that make sense and can help you with more than just the money.
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Government Backing
Buxeros Capital was established in 2016 and has since operated in conjunction with the Dutch Good Growth Fund (DGGF), a government backed project form the Ministry of Foreign Affairs which aims to match each investment Buxeros secures for small to medium enterprises in emerging markets.
Numerous governments around the world have similar initiatives and have capital dedicated to investment, particularly in emerging markets and developing countries. In this case, the DGGF provides half of the investment funds Buxeros’ aims to secure for its client. However, it won’t always be necessary for a government backed investment project to be conjoined with a private equity fund in order to secure the government’s investment, so have a dig and find out what your local government offers and how you can make the most of this.
A firm that has truly benefitted from the backing of the DGGF, alongside Buxeros’ input, is Blue 21, a Dutch enterprise focused on the research and development of floating architecture and urban development, particularly in areas affected by rising tides and where living on the waters is central to the locality’s lifestyle. By working alongside the Dutch government, and with the local authorities being corporately invested in the venture, the combination of expertise, cooperation and unified drive holds great promise for success and in this case has provided great confidence in delivering results that have positively affected Dutch localities on the waters.
Blue 21's floating homes
Having a combination of government backing and a private equity firm like Buxeros behind their venture has been incredibly useful, not just because they have the funds to move forward, but because they are now within arm’s reach of new opportunities and the prospect of expanding into more developing nations and making a difference in more and more places that need their help.
Karina Czapiewska, expert developer at Blue 21, put it like this: “The products that Blue21 develops are very complex; a floating building, district, town or even a city. Therefore, each product that is being developed cannot exist without a location, which in turn must consider the local context, local rules and regulations and often even the lack of context, rules or regulations that still need to be created along the way.
“To arrange this, a strong collaboration with the local authorities is needed. These collaborations start at a very early stage and it can often take a long time before anything is developed at all. Buxeros has a large network and plenty of experience in several parts of the world, and they have proven to be crucial in finding the right contacts, the right network and the right funding.”
"Each product that is being developed cannot exist without a location, which in turn must consider the local context, local rules and regulations and often even the lack of context, rules or regulations that still need to be created along the way."
Conclusion
In terms of expertise, cashflow, international rapports, know-how, contacts and support (all of the things you will need to grow and expand your business), finding the right combination of government help, whether it’s financial or not, and investor backing, whether it’s through a peer to peer arrangement or a private equity fund, will be ideal for your plans.
Securing investment is difficult and can take months if not years at a time, but if you have something you know will work, then find the people who will and more so, want to back you financially because they believe in it and because they too wish to see it succeed.
For Buxeros, the approach to securing investment for SMEs in emerging markets has meant that the firms looking to be funded got more bang for their buck. They set out to secure the necessary funds they needed to expand but walked away with the addition of investment partners that can connect them to the right people, government help and support from local authorities, as well as a partner that is 100% intent on seeing the positive impact of their venture succeed.
Corné Melissen (Director of Buxeros Capital)
This morning's news comes as no surprise given the state of play, but as the Dow Jones hits its third-worst point in history, investors are waking up to the prospect that this may be just the beginning of what’s to come.
Some economists are warning that the pandemic could push the Bank of Canada and the US Federal Reserve to consider cutting interest rates sooner rather than later; a clear sign of more to come. Benjamin Tal, deputy chief economist at CIBC Capital Markets, told The Financial Post: “It is reasonable to assume that coronavirus is going to last longer given the infection rate is higher than SARS and is still climbing. That itself, might convince the Bank of Canada and even the US Fed to cut interest rates. I wouldn’t be surprised.”
“This is just the beginning of coronavirus, and there is a consensus starting to be generated that maybe, it will last longer than expected.”
In terms of numbers, the Dow Jones Industrial Average dropped 1,031 points, or 3.56% on Monday, while the S&P 500 plunged 3.3%, the biggest drop since last August. Global demand for oil has stalled, leaving the price to fall as much as 4% over the weekend. The price of gold on the other hand, went up, as investors attempt to put their money where it’s safe.
According to Frances Donald, chief economist at Manulife Investment Management: “The virus spread comes at a time when companies are already facing significant inventory restocking and a stalling in global manufacturing following the application of tariffs and overall trade tension…Coronavirus is adding salt to the wound.”
The good news is that based on past research from the Bespoke Investment Group, over the past 11 years, declines of more than 2% for the S&P 500 have resulted in healthy rebounds, particularly when the largest drop happens on a Monday. However, both analysts and investors are highly sceptical moving forward, and the next few weeks should give some indication of how stocks will play out in the wake of coronavirus’ furore.
Markets and stocks in Europe were hit hard over the weekend, and though there has been some rebound, the spread of the coronavirus outbreak is seriously affecting markets worldwide. 12 Italian towns were locked down over the weekend, following over 150 cases and four deaths. As a result, the pan-European STOXX 600 index and Italy’s FTSE MIB Index were down 3.3% and 4.3% respectively.
“Italy’s lockdown, as the country tries to control the worst outbreak of the virus in Europe, has caused investors to panic about how business and society will be affected,” Russ Mould, investment director at AJ Bell, told Yahoo Finance.
“There has been so much complacency in recent weeks from investors, despite clear signs that China’s economy is facing a large hit and that supply chains around the world were being disrupted,” he added.
On the other hand, gold has seen a strikingly opposite effect, as the value of gold has now reached a seven-year high in the wake of the coronavirus outbreak. It’s clear that although some investors have been complacent in protecting their investments, some have resorted to storing their money in gold, a safe investment space.
According to recent figures, gold prices climbed around 2% this week, up to levels not seen since February 2013. Prices are now fluctuating as high as $1,678.58 an ounce.
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On the topic of complacency, the deVere Group’s CEO, Nigel Green has warned: “Many investors remain complacent about the far-reaching impact of coronavirus, which is continuing to spread – and at a faster pace. This will inevitably hit financial markets and investors’ complacency leaves many wide open to nasty surprises.”
“Against this backdrop and with the ongoing uncertainty over the direction of stocks and other risk assets, multi-asset portfolios might be favoured by global investors, given that they offer diversification of risk as well as of return.”
In what is set to be one of Wall Street’s biggest deals since the crash over a decade ago, Morgan Stanley is intent on buying E-trade in a $13 billion all-stock transaction. The deal will continue Morgan Stanley’s ongoing transformation into a more reliable financial firm that relies more on assets and wealth management.
The purchase of E-trade will carry across 5.2 million client accounts, $360 billion in retail clients’ assets and further customers that may now make use of Morgan Stanley’s vast expertise. Current rivals Charles Schwab and TD Ameritrade are currently mid-merger, so this consolidates Morgan Stanley and E-Trade position in the investment brokerage markets.
Forrester’s senior analyst, Vijay Raghavan told Finance Monthly: “In the wake of the price war that first started when Schwab got rid of stock trading commissions, E-trade was weakened because of its reliance on commissions - just like TD Ameritrade (before it was acquired by Charles Schwab).
“Nearly half of E-trade’s customer base (48%) is comprised of self-directed investors. Self-directed investors prefer robust trading tools, real-time market commentary, and charting tools, to name a few.
“Morgan Stanley’s wealth management business serves an affluent investor base who comprise the delegator segment, relying on financial advisors to make investment decisions for them.
“This acquisition complements Morgan Stanley’s existing affluent customer base, providing them with a wider array of customers with different levels of investable assets. It also gives them a direct-to-consumer brokerage business, and $56 billion in deposits which will help cut down on risk during an economic downturn.”
BrokerChooser is a global online service for comparing and choosing investment brokers. Below, their CEO and co-founder Tibor Bedő talks us through the awards process, discusses the top five awards and the firms that have been selected, providing some insight on the complex world of investment brokering.
Every year we carry out a comprehensive review of the market and of the brokers in it. We then make awards based on nine criteria: fees, trading platforms, product portfolio, security, account opening (ease and cost), deposit and withdrawal (costs and time it takes), customer service (the support across all channels), research (the resources and tools they provide) and education (does the broker offer support services such as webinars and other tool).
This year we collected much wider and more in-depth data on brokers and their services than ever before. Our aim was to make the scoring more precise and better reflect the differences between brokers.
This year we collected much wider and more in-depth data on brokers and their services than ever before. Our aim was to make the scoring more precise and better reflect the differences between brokers.
It was important to use the right parameters for each category. To ensure we got this right, we interviewed our customers about their preferences and, of course, also used our own professional knowledge and insight into the brokerage industry.
There were 24 awards in total. However, the key ones, the winners, and the criteria we used for judging them, are below.
1. Best online broker was won by Interactive Brokers
We considered how brokers performed across all the criteria, particularly fees, product selection and trading platforms. This is the second year in a row that Interactive Brokers have won this category. It won high scores due to its low trading fees, comprehensive product range, and well-developed trading platforms. It is a strong company with a great reputation.
2. Best discount broker was won by DEGIRO
This award is all about the fees and how cost effective the broker is. It is a key consideration with our customers. DEGIRO won this for the second year in a row as its trading fees are low for all asset classes. In addition, there are no withdrawal, inactivity, or account fees charged.
3. Best broker for stock trading was also won by DEGIRO
Stock is one of the most popular asset classes (more than 60% of our clients focus on investing in stocks). The main parameters for this award are fees, stock exchanges availability and the overall quality of their service. DEGIRO won this award due to its low stock fees, global stock exchange coverage, and the high quality of the service it provides.
4. Best forex brokers was won by Saxo Bank
Here we were obviously looking for outstanding performance in criteria that are relevant to forex trading. Our customers told us that these are low forex and withdrawal fees, advanced trading platforms with great charting tools, and wide range of currency pair selection. Saxo Bank has performed well in all these categories.
5. Best discount forex brokers was won by Fusion Markets
This is a new broker category. We created it as many from our customers are looking for great value forex trading. The most important factor here is therefore the forex fees. Fusion Markets charge the lowest commission per lot for buying and selling the currency pairs ($2.25) and doesn't charge any withdrawal fee.
The other awards and their winners were:
Best broker for funds Firstrade
Best broker for bonds Fidelity
Best CFD broker XTB
Best broker for cryptos eToro
Best broker for options TD Ameritrade
Best broker for futures Interactive Brokers
Best broker for beginners Robinhood
Best broker for millennials Revolut
Best broker for buy and hold TradeStation Global
Best broker for day trading Interactive Brokers
Best web trading platform Saxo Bank
Best mobile trading platform Oanda
Best app for stock trading Robinhood
Best desktop trading platform TD Ameritrade
Best broker for research Saxo Bank
Best broker for API trading Oanda
Best social trading eToro
Best digital bank Revolut
Best robo-advisor Betterment
All the winners offer exceptional services but of course there are some brokers who perform very badly. Even investors with a lot of experience can find it difficult to identify the good ones, or the ones that suit them best, without weeks of research. The idea behind these awards is that we do this work for you.
Cryptocurrencies are often compared to gold. They have a number of features in common – independence from governments, limited emission, and a user consensus ascribing value to them. This is especially true in the case of bitcoin, the first cryptocurrency that still retains the status of the “default crypto”, just like gold retains the status of the most important precious metal.
However, cryptocurrencies are also vastly different from metals: they are a lot easier to trade. Below Victor Argonov, Analyst at EXANTE, explains more for Finance Monthly.
Physical gold is extremely difficult to buy, sell, and trade across national borders, and nearly impossible to use as legal tender. Gold turnover is subject to heavy taxation, and many prefer to invest in precious metal accounts instead of physical gold. Cryptocurrencies, on the other hand, are easy to buy and sell, can be freely traded across borders, and their use as legal tender is becoming increasingly more common.
These similarities and differences between cryptocurrencies and precious metals are common knowledge. However, one crucial question remains unanswered – how much they are able to function as a protective asset, retaining their value during crises.
Theoretical Considerations
Currently, one of the key arguments against the use of cryptocurrencies as protective assets is their high volatility. BTC cost $0.1 in 2010, $1,000 in late 2013, $200 in late 2014, $19,000 in late 2017, and around $7,000 today. Even just in 2019, which can hardly be called a particularly volatile year, its exchange rate still fluctuated by a factor of four over the year. Crashes are commonplace on the market, and no matter when you buy cryptocurrency, there is no guarantee that your capital is not going to halve in a month.
On the other hand, the key argument for keeping one's funds in cryptocurrency is its tendency to grow in value as the number of its users increases. Cryptocurrency emission is limited by algorithms. With BTC specifically it is actually decreasing, which minimizes inflation. Currently a few dozen million people on Earth use cryptocurrencies, and their number doubles every year. Even 2018, disastrous as the year was, saw the number of users increase from 18 to 35 million. At the same time, the potential new audience is still huge, and in tandem with guaranteed low inflation it usually stimulates growing exchange rates, regardless of the bubbles that may occur.
The key argument for keeping one's funds in cryptocurrency is its tendency to grow in value as the number of its users increases. Cryptocurrency emission is limited by algorithms. With BTC specifically it is actually decreasing, which minimizes inflation.
The increasing number of crypto users not only boosts the cryptocurrencies' exchange rates and capitalization, but gradually decreases their volatility as well. Here is a rough comparison, which nonetheless illustrates the situation. Over the four years between 2010 and 2013 the BTC exchange rate changed by four orders of magnitude, while in the next four, including the dip in 2014 and the enormous bubble in 2017, it only changed by two orders of magnitude. It is true that even the modest fluctuations in 2019 are huge compared to the traditional stock and currency markets, but this is a predictable consequence of the low market cap, which is currently at around $200B. Even when taken individually, the world's largest companies like Facebook or Saudi Aramco have market caps several times that amount, while those of the global stock and currency markets have several orders of magnitude that market cap. So the current volatility of the cryptocurrencies may simply be a sign that they are still in their infancy.
Practical Evidence
There are many known cases of cryptocurrencies serving as a protective asset, primarily during national currency crises. In 2018 the national currencies of Turkey, Argentina, and Venezuela experienced drastic devaluation. While previously citizens of these countries tried to buy dollars in similar situations, this time many people turned to cryptocurrencies. As an example, in August 2018 the number of cryptocurrency users in Turkey was double the average number for Europe.
The cryptocurrencies' protection against fiat currencies' devaluation is not limited to unstable countries with only a small share on the global market. For example, statistics show that the BTC exchange rate usually increases as the Chinese yuan's rate drops.
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However, none of these examples make cryptocurrency unique. When one country's fiat currency devalues, any other country's fiat currency may serve as a protective asset if it is more stable. What makes gold unique is that its role as a protective asset is universal. Not only does it protect its owners from national currency devaluation, but from stock market crashes as well. Gold exchange rate is not particularly stable and has its own fluctuations, but it is fairly independent of stock index fluctuations. Does cryptocurrency have the same advantage? As practice shows, no.
From 2014 to 2017 BTC's exchange rate usually changed in the same direction as the indices, and often with much greater amplitude. In the fall of 2018 it briefly looked like the situation was changing. The 2017 bubble had already deflated, and the volatility of the digital assets dropped by several orders of magnitude (as it usually happens after bubbles). When American stocks started dropping in price due to the trade war with China, BTC did not follow the market's lead and had indeed served as a protective asset.
However, it was unable to cement that role. November already saw a new cryptocurrency crash that was followed by the infamous crypto winter. Whether it was chance or an expected event, it roughly coincided with the maximum dip in the stock market. The indices recovered due to the negotiations between the US and China in the spring of 2019, and so did the cryptocurrencies.
Very Risky, But Still A Protective Asset?
Overall, the properties of gold and cryptocurrencies as protective assets are very different. If you are afraid of your national currency experiencing inflation, cryptocurrency can protect your capital, but if you are a stock investor, expect cryptos to dip during a crisis as well. The reason for this is simple: despite their advantages, cryptocurrencies are still considered a very risky asset compared to securities and gold. They are exactly the assets the investors try to get rid of as soon as possible during difficult times.
Despite their advantages, cryptocurrencies are still considered a very risky asset compared to securities and gold. They are exactly the assets the investors try to get rid of as soon as possible during difficult times.
On the other hand, in the long term cryptocurrencies are still a protective asset. If you are not afraid of long exchange rate dips and are not prone to dumping all your assets during crashes, you will probably be rewarded over the years. While cryptocurrency growth on the scale of 2010-2013 is unlikely, their exchange rates are still expected to multiply in the next few years. To date, every bubble on the crypto market resulted in a substantial growth of the exchange rates. For example, the BTC rate of $3,000-4,000 during the crypto winter of 2018-2019 was vastly higher than in any year before the 2017 bubble.
The only thing that can seriously undermine the global positive trend of the cryptocurrencies is a complete ban on them by leading countries. However, this seems unlikely. With every year, more and more influential financial communities join the cryptocurrency market, and they would not want to leave it.
The increasing popularity of cryptocurrencies will eventually slow down their upward trend, but is also likely to greatly decrease their volatility and make them more similar to traditional protective assets like gold. How close that similarity would be is, as yet, unknown.
Delving into the latest impacts of Donald Trump’s impeachment trials on investors around the world, Wael-Al-Nahedh, CEO at Spearvest, gives us a rundown on the influence of global politics and the volatility of investment in 2020.
After three years of failed negotiations, sharp words, a prime ministerial resignation and a Christmas general election, at long last the UK government has a clear majority and the overall decision on the country’s future relationship with the European Union (EU) has been agreed. On top of this, China and the US trade deal tensions seem to be simmering down and global markets can look forward into what we all hope will be an extended period of global market stability. Meanwhile the ongoing stand-off between Iran and the world’s biggest economy appears to have quietened down, at least for the moment.
What’s more, in December 2019 and after months of speculation, the world watched as Donald Trump became only the third president of the United States history to be impeached, only to be swiftly acquitted, as was expected to happen given the Republican majority in the Senate.
However, as recent events in Wuhan, China have proven, major challenges can appear suddenly and without warning. The fast-spreading Coronavirus in Wuhan has already had a substantial impact on the Chinese economy. This crisis has led to fears around international travel and public health emergencies, in turn damaging supply chains and knocking investor confidence just as it was starting to bounce back.
This was a reminder that repercussions from local risks can have a global impact on financial markets. Specifically, what are the current challenges and how can investors navigate these situations?
Financial Markets throughout election year
All eyes will be on the US election this year, and many investors will tread cautiously in the US stock market depending on updates and promises in policy, and polling predictions when it comes to the people’s favourite candidate.
In the short term, the election can affect corporate confidence due to Trump’s business-friendly policies, such as his reform on corporate tax, could be at risk of being replaced by more topical economically viable policy.
In the short term, the election can affect corporate confidence due to Trump’s business-friendly policies, such as his reform on corporate tax, could be at risk of being replaced by more topical economically viable policy.
Alternatively, we might see certain sectors flourish from now until election day, as trade deals are renegotiated or tariffs on foreign goods are imposed or revoked. It was announced this week that China will halve tariffs on some US imports as it moves quickly to implement its ‘phase one’ trade deal.
History dictates that election years often offer prosperity when it comes to the stock market, regardless of who is eventually elected. In fact, when examining the return of the S&P 500 Index for each of the 23 election years since 1928, only four have been negative.
US-Iranian tension
US and Iran haven’t had the best of relations for a few decades now, and US sanctions on Iran’s oil exports last year had already crippled the Iranian economy. And, to see the new year in, tensions flared as a US-led drone strike killed General Qasem Soleimani in Baghdad.
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On January 10th, Trump announced sanctions that went beyond oil and gas and now targeted construction, mining, manufacturing and textile goods. As a result, trade with Iran is flatlining worldwide and investors, companies and lenders should do well to avoid any partnership or investment with Iranian goods or businesses, such as the recently blacklisted, Mahan Air.
On the other hand, market impact hasn’t been as severe as one might have initially expected. Oil prices are still below the level they hit in September 2-19 after the Saudi Aramco oil attack.
The situation in China
The most significant impact on the global economy has emerged as a result of a Global Health Crisis, as a new strain of Coronavirus has all but isolated China from the rest of the world. The true impact on the economy resulting of this terrible human tragedy, is as yet unknown.
Short-term impact on the stock market in China has correlated to the global significance of this devastating virus: stock markets in china saw their biggest fall in five years as traders rushed to sell-off Asian equites amid continued fears about the impact of the Coronavirus on the global economy. Investors should keep a keen eye on the spread of this virus, as we could see it affect international markets quite severely should the number of cases of infection increase dramatically in key markets such as the US or Germany, for example.
The virus has also had a substantial impact on oil markets, with prices declining sharply as demand from China dissipates through diminished air travel, road transportation and manufacturing. Given the fact that China under normal circumstances consumes 13 of every 100 barrels of oil the world produces, we can expect the impact on oil markets to further increase should this global health crisis widen.
If not contained, retail sales and travel could suffer consequently in the next few months, especially as industrial production struggles to recover after last year’s extended slump and the consequences of the US-China trade war, which has already cut Chinese economic growth to its lowest level in 29 years.
How to navigate challenges
Such episodes of global nervousness often - counter-intuitively - represent considerable opportunity for those investors who are willing to buy when others are selling. Attractive opportunities typically arise in times of high volatility, which brings to attention the importance of relying on independent and unbiased advice before deciding to invest at a time of great global economic and political uncertainty.
Some of the highest returns in global markets often happen around periods of high volatility in an unpredictable fashion, and that is why thorough planning and a long time horizon give investors a great advantage. Over 10 years, equities have earned excess returns over cash 95% of the time. The return of a buy-and-hold investor in the S&P 500 over the past 20 years has been more than 220%, versus just 42% for someone who sold at each new all-time high and waited for a 5% pullback to reinvest.
Finally, one should always diversify an investment portfolio adding into low-correlated investments, include income-generating hard assets (like real estate), invest with a long-term horizon, and of course increase the understanding of risks.
This begs the question – is there a formula that traders rely upon to effectively manage their investment portfolios?
According to Giles Coghlan, Chief Currency Analyst at HYCM, in short, the answer is no. Below he explains why the size and complexity of financial markets means it is virtually impossible to stay on top of every major and minor trade occurring across the world’s key markets.
Investors can consult with online tools that provide live updates and succinct summaries of asset price movements; however, having access to this knowledge will only go so far. The big challenge is understanding how to use this information to inform trades and investment strategies.
With the US-China trade war, the US Presidential election, the spread of the coronavirus, and the UK’s withdrawal from the EU just a few of the major events likely to shape 2020, now is an important time to understand the techniques regularly used by traders and investors when confronted by certain political and economic conditions.
The stock market is all about cause and effect
Staying on top of market movements can best be achieved by first understanding the basic principle of causality. By this, I mean that one event, trend or market movement will inevitably contribute to another, leading to a constant hive of activity.
For example, decades’ worth of quantitative evidence indicates that during volatile trading periods (often brought on by an unforeseen political or economic event), investors rally to hard assets like gold and oil. This model was played out in the opening weeks of 2020. With military tensions between the US and Iran rising, market demand for gold surged considerably. As a result, its price per ounce reached $1,600 USD on 7th January 2020 – its highest price in nearly seven years.
In the above scenario, investors rallied to gold due to its ability to retain or increase its value in times of market turbulence. This is why it dubbed a ‘safe haven asset’. What’s more, a similar observation can be made when confronted with the opposite scenario.
History regularly demonstrates that during periods of market stability, investors tend to look to stocks and shares. While much more sensitive to sudden movements and shifts, these soft assets also allow investors to leverage growth in different sectors by actively investing in different companies. Investing in stocks and shares can also bring with it the added benefit of dividend and stock repayments.
History regularly demonstrates that during periods of market stability, investors tend to look to stocks and shares. While much more sensitive to sudden movements and shifts, these soft assets also allow investors to leverage growth in different sectors by actively investing in different companies.
Understand what type of investor you are
For early-stage investors, there is a tendency to think that acting fast when reacting to a sudden market movement can deliver significantly higher returns. While this is true to an extent, it also fails to consider the huge level of risk involved with such a tactic. Professional traders and seasoned investors understand this, which is why they are prepared to take on any losses that could be incurred as a result.
Alternatively, for those using the financial markets as a way of building up solid, long-term returns, engaging in short-term trades is a very high-risk strategy that could incur significant loses. Not accounting for these loses might then result in an investor having to restructure his or her investment portfolio and ultimately change their financial strategy.
There is no right or wrong answer here. High risk, high return investors approach the markets in a completely different manner than low risk, low return investors. Regardless, it is important to identify what type of strategy you’re adhering to and stick with it.
For example, renowned investor Warren Buffet stayed committed to his value-orientated strategy during the 1990s by deciding not to invest in the dot-com boom. In the short-term, he did lose out on immediate gains from tech companies that were increasing in value and size. Yet in the long-term, he also avoided the dot-com crash, where many of the online companies that initially emerged began to crumble.
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The same can be said when faced with a sudden market shock. The key rule to remember here is not to panic but rather trust the financial strategy you have in place. Acting with your heart instead of your mind is never a good idea in the world of investing.
Use the market to your advantage
There is ultimately no perfect formula or strategy that is universally applicable to all investors. However, by learning about past events and understanding how different asset prices reacted, there are plenty of underlying lessons that can be taken onboard.
Above all else, creating and adhering to an investment strategy that aligns closely to your financial goals cannot be overlooked. And if you are ever in doubt, be sure to speak with a financial professional.
High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.
Below Finance Monthly hears from Steve Moss, Founder and CEO at P2P lending specialists Sourced Capital, on the ins and outs of the FCA regulations, the overall plans behind the new rules and what investors can expect when applying for financing.
These stricter onboarding measures now require potential investors to answer a number of questions focused around investment, to ensure they possess the required knowledge to make educated decisions when investing, thus improving the sector for investors from a quality control standpoint and ensuring they receive a greater level of security and protection, a positive for P2P lending industry as a whole.
At our firm we place investor welfare at the heart of their business model and see these regulatory changes as the first step towards a more transparent, investor-friendly sector. We've recently invested in a new platform that provides a simpler and easier user experience for customers in anticipation of these industry changes, so that while standards progress, the ease at which someone can invest remains the same.
The platform means that customers can transfer their ISAs online and use it to invest in property instantly with e-wallet control on their integrated dashboard. Investors can also invest with their SIPP or SSAS pension, or regularly with cash. The company also uses regtech processes such as an anti-money laundering check (AMC) and know your customer (KYC) identification checks. The AMC and KYC checks are in place to verify the identity of individuals carrying out financial transactions and screen them against global watchlists.
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But while Sourced Capital has worked hard to keep the process as straight forward as possible, these latest changes have still left some investors a little deterred, so what should you expect when tackling these newly introduced questions?
The areas covered to ensure investor knowledge are quite robust and include but are not limited to topics such as: -
- The nature of the client’s contractual relationship with the borrower, and with the platform.
- The client’s exposure to the credit risk of the borrower.
- Their understanding that all capital is at risk.
- The understanding that investments in P2P lending are not covered by FSCS.
- That your returns may vary over time, that entering into P2P agreements or investing in a P2P portfolio is not comparable to depositing money in a savings account.
- That where a platform has not adopted any risk mitigation measures, the extent of any capital losses is likely to be greater than if risk mitigation measures were adopted by the platform, the role of the platform and the scope of its services, including what the platform does and does not do on behalf of lenders.
- The risks to the management and administration of a P2P agreement or P2P portfolio in the event of the platform becoming insolvent or otherwise failing.
While this may sound daunting, the process is designed to really boost the level of investor knowledge and this will be gauged through questions such as:
When Underwriting a Loan for a New Project Sourced Capital will:
❌ Do no Due Diligence at all as Lenders Will Do Their Own Research
✅ Sourced Capital Carries out Due Diligence Internally and Remotely. Though Lenders Are Advised to Carry Out Their Own Research on Every Investment They Make.
How should you manage the risk of your investments?
❌ Put all my money into Peer to Peer Lending
✅ Build a diversified investment portfolio covering many different investment classes after seeking independent financial advice
I Have Invested with Sourced Capital and Received Great Returns, This Means:
❌ I Will Continue to Always Receive Great Returns, My Capital is Not at Risk.
✅ Past Performance of Investments is Not an Indication of Future Performance. Each Investment I Make Should be Considered Individually
These stricter onboarding measures now require potential investors to answer a number of questions focused around investment, to ensure they possess the required knowledge to make educated decisions when investing, thus improving the sector for investors from a quality control standpoint and ensuring they receive a greater level of security and protection.
But are these measures enough?
They are at the very least, a step in the right direction.
The Peer 2 Peer sector has received some stick over the years and as you’ll find with all business areas, there are certain less scrupulous types that sometimes drive this, whilst some of us have been working hard to raise the bar. These latest regulatory changes by the FCA are a positive step in the right direction in terms of improving standards and investor welfare across the board, and the extensive knowledge now required will ensure that investors are far more educated than previously and not only does this help them in terms of the decisions they will make, but it helps improve the quality of the sector as a whole.
Of course, there is always more that can be done and until this is introduced at the top level, it’s the responsibility of us as sector professionals to drive positive change. For example, all our investors get a first charge against the property invested in, which gives a greater level of protection and lowers risk but is something that not all platforms do.
We always recommend that investors only opt for FCA approved companies which again reduces risk, while we also only loan at maximum loan to value of 70%. We also offer all investors the chance to view a project and to learn directly from us which again, is something that other platforms don’t offer, but for us, it provides greater transparency and trust while helping improve knowledge on a particular investment.
This week Chief executive and chairman Larry Fink sent a personal letter to clients stating the firm would be focusing on sustainability as BlackRock's "new standard for investing."
“Climate risk is investment risk...Indeed, climate change is almost invariably the top issue that clients around the world raise," Fink wrote.
The firm, which manages $6.9 trillion for investors all aorund the world, communicated that it would pulling out of any "high sustainability-related risk" investments such as fossil fuels and that it would be including questions pertaining to sustainability as part of its process when building new client investment portfolios.
Fink also stated BlackRock will be weighing in its shareholder vote on many sustainability and climate issues that arise in shareholder decision making.
The CEO's letter also read: “Climate change has become a defining factor in companies’ long-term prospects.
"Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect.
“But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”
In the letter Fink makes reference to climate change as a highly impacting factor in investment models, claiming that this new approach will destroy existing products and create new markets, ridding traditional investments and creating fresh and new opportunities for investment.
“What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas?” he said. “What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?”
This statement will have significant impact on the proceedings and discussions that take place at the World Economic Forum in Davos next week, as the drive to protect investor value will turn towards climate change and sustainability as key considerations to factor into each and every investment.
