2020 has been a turbulent year for investors to say the least. Stock markets, in particular, have seen unpredictable swings, both negative and positive, from the beginning of the year to date. When we look back to the early stages of the pandemic, markets overall were down around 30 per cent in late March. This was followed by a recovery over the spring and summer to the levels of today. We are now in a similar position to where we began the year.
Such a quick recovery is hard to fathom when we have all been restricting our movements, shopping much less, socialising much less, travelling much less and on the whole spending far less money.
With this in mind, how can we realistically look at stock markets for our pension contributions this year and feel comfortable that we are not investing at the peak of the market which is destined for a fall?
S&P 500
The US tends to take the lead when it comes to stock market investing and the S&P 500 is the primary market that we look to when evaluating performance trends. At present, the principal leaders there are technology-based stocks. Reflecting on the last six-seven months it is easy to see why.
As our normal spending activities have been hindered due to the lockdown, companies that principally trade through online activity have done extremely well and that is emphasized in their share performance. The colloquially known FAAMNG stocks — Facebook (+21% ), Amazon (+63%), Apple(+47%),Microsoft (+28%) and Netflix (+46%) Google (Alphabet +6% ) — have all shown huge growth in their share prices year to date.
These stocks are all referred to as ‘growth’ stocks and the higher valuations of these companies represent a very significant part of the recovery of the S&P 500, in fact these companies amount to more than 20 percent of the index at present.
Growth stocks have very much left behind the ‘value’ companies of the index. Value stocks do not tend to get the headlines as they have steady predictable business models. They generate modest gains in revenue and earnings over time and also pay dividends to their shareholders. No one can call when value stocks will come back into vogue, they will someday but it could be either a short or long wait.
Technology stocks are not going away either so the answer may be in investing monthly through the volatility rather than just once per year. It is always impossible to call the top or the bottom of the markets, averaging the cost is often the best solution.
Dividend focussed stocks and funds
With Government bond yields and interest rates so low/ negative, stocks that provide an income for the investor can be very attractive. For example, Vodafone currently has a forward yield of 7 per cent, GlaxoSmithKline 5 per cent, Diageo plc 2.8 per cent. Alternatively, if you wished to take a view on sterling and Brexit you could buy a FTSE 100 index ETF with a 4.45 per cent yield. Dividend Funds also offer a good alternative, for example the Murray International Trust is currently yielding 5.64 per cent. All of the above carry capital fluctuation with no guarantees. However, they may offer an answer to some of your portfolio and income requirements if you are willing to contend with their variable capital values.
Commercial property
It is difficult to see a downward economic trend without property prices being negatively affected. With so many of the workforce required to work from home there seems no doubt but commercial property valuations will be negatively impacted. We have already seen Google change their mind on taking up large office space in Dublin as their staff can work effectively from home.
Retail space must also surely come under pressure at some point. Many of the larger shopping main streets and malls have significantly reduced footfall than anticipated when their leases were last signed. If the companies leasing these units survive to the next rent review, they will surely see a downgrade in rent. As we presently cannot see an end to ‘working from home’ for the larger companies nor a return to main street shopping by the consumer, it is tough to see for how long and by how much these commercial valuations will suffer. If science can provide a solution to the Covid-19 issue in 2021 we may see offices return to somewhat full capacity and the consumer bring the physical shopping experience back into their lives away from online purchasing.
Residential property
Residential property offers a different perspective on investing in bricks and mortar. People are currently spending more time in their homes as increased work and recreation is taking place there. The majority of demand for residential renting is now in the suburbs. Without the hustle and bustle of busy streets, offices, pubs, and theatres the attraction of city centre living has declined, thus bringing down rents.
Landlords in rent pressure zones will find it hard to increase them again, hence many are leaving properties vacant for the foreseeable future. It is likely the demand for city living will return once the pandemic has passed so there could be some value to be had in this sector. In its favour also is the fact that residential property should always give a yield to the investor. That figure may fluctuate, but people always do wish to live in quality accommodation. For the pensioner looking for income, well-purchased property can give welcome revenue in retirement, particularly with interest rates so low.
Advice
Monthly cost averaging with indexation is my preferred style at present. This means that you buy-in either on the way up, or the way down, but neither wholly at peak nor trough. If possible, it is a more prudent way of investing during the current volatility.
By John O’Connor, Managing Director, Omega Financial Management Printed in the Irish Medical Times, Personal Finance column October 2020