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Falling investment markets

By Mark Quinn - Topics: Investment objectives, Investment portfolios, Investment Risk, investments in Portugal, Portugal
This article is published on: 9th June 2022

09.06.22

Markets have fallen recently with concerns over rising inflation and interest rates and the war in Ukraine. In this uncertain environment, clients are asking me: “should I sell?”, and those with cash to invest are uncertain if now is the right time to commit to investing.

Why do falling investment markets cause concern?
Rather than seeing movements in markets as being completely normal and part of the regular cycle in markets, I believe the media instills fear among investors. I follow the financial news every day and read headlines dominated by talk of slumps, crashes, stagnations, recessions etc. but rarely see positive news stories about investments and markets such as how many global stock markets reached all-time highs in 2021.

This is getting worse with internet-based news as “click bait” headlines are used to prompt us to click through to read these apparently disturbing events.

Humans are bad investors
Our brains are not designed to make sound investment decisions as we are subject to biases and cognitive distortions and our emotions, rather than fact and logic, overly influence our decisions. One of our biggest weaknesses is our loss aversion which can lead to not taking advantage of investing at low prices during market falls.

Professionals versus amateurs
We often see professional investors reacting in an opposite manner to the general public/retail investors. Many retail investors will sell and are fearful when markets fall but professionals will be taking advantage of lower prices and be purchasing investments.

falling investment markets

Context for investing
It is important to reassess exactly why you should invest. Most people do so to protect their lifestyle as they want to ensure their investment and pensions maintain their real value after inflation over time – this isn’t possible in cash.

If you are investing for the long term, then you increase your chances of generating longer term growth and we know that, even though markets may go lower in the short term, over the longer term you are “stacking the odds” in your favour.

Time is on your side with investing
Data shows that the risk of stock market investment reduces with the time you spend in the market as you have the ability to weather the short term ‘blips’ in market. For this reason there is a popular stock market adage that time in the market is more important than timing the market.

Holding through downturn
The benefits of holding though short-term falls in the market were highlighted to me recently by Terry Smith, manager of the Fundsmith fund. He gave an example of a share he purchased at the end of 2007 for $7.07 and by 26th February 2008 it had lost almost 40% of its value at $4.28 – this promoted a lot of investor anger at his decision. However, this short term blip is dwarfed by the enormous increase the share price subsequently enjoyed, increasing in value to $172.39 by 4th February 2022. The company was Apple, until just last week the most valuable company in the world.

Tips for investors in this climate

  • Invest as early as possible and remain invested – act against ‘herd’ instinct
  • Remove the psychology from investment – draw up an investment plan and stick with it
  • Minimise tax – one of the biggest eroders of investment returns
  • Minimize fees on your investments and pensions – another big eroder of returns
  • Asset allocation – predicting which parts of the market will weather the storm better is difficult, so ensure you have a correctly constructed portfolio which is widely diversified and importantly, has corelation benefits

Investment management styles

By Mark Quinn - Topics: investment diversification, Investment objectives, Investment portfolios, Investment Risk, investments in Portugal, Portugal, wealth management
This article is published on: 27th May 2022

27.05.22

There are several different investment management styles to consider and each will have benefits and drawbacks. The key difference are between a managed/active/discretionary route, and a passive/tracker approach, and this can be a divisive area within the investment industry.

In order to put into context the differences between these styles and which approach may be right for you, let’s first look at what a stock market index is.

An index simply measures the performance of a group/basket of shares. For example, the S&P 500 index tracks the performance of the shares in the largest 500 companies in America. As the US market is the largest stock market in the world, and the US is the world’s largest economy, it is often seen as a barometer for the health of global markets in general. The equivalent index in the UK is the FTSE 100 index.

Investment management styles

Managed/active management/discretionary
Historically, most private investors would invest through a fund manager. In this way, you would pay an annual percentage fee to an investment institution to actively manage your investment i.e. make the buying and selling decision on your behalf.

The aim of investing in managed investments is to generate better investment returns than the stock market index as a whole, or another appropriate benchmark.

Discretionary investment is a specialist branch of managed investment whereby the manager has a greater range of investment powers and freedoms to make buying and selling decisions without your consent (although always within with the remit and investment powers that you grant at outset).

Over recent years there have been numerous studies to suggest that many fund managers do not achieve their aims of beating their respective benchmarks, and it has led some investors to favour a “passive” investment approach.

Passive or index trackers

Passive investment does not employ a fund manger to make decisions, and instead of trying to outperform the market, you simply ‘buy’ the market as a whole. For example by investing in an S&P 500 tracker, you would effectively be purchasing the top 500 shares in the US stock market.

The key difference between the managed style is cost i.e. whereas a manager may charge between 1-2% per annum to manage your fund, you can access a tracker fund from as little as 0.1% which can make a huge difference to your fund value cumulatively.

Proponents of this approach accept they will only even achieve the return of the market as a whole (with no outperformance) but because you are spending far less in fees, believe they will do better over the longer term.

Proponents of active management on the other hand highlight the drawbacks of the passive approach viz. in a falling market, you will only ever track a falling market, tracker funds “blindly” sell what may otherwise be high quality investments at inopportune times, and that tracker investments can still be complex to understand, such as the difference between ‘synthetic’ versus ‘physical’ tracking methods.

Summary – balance pays
As my previous two articles have demonstrated, tax and investment planning generally involves shades of grey, rather than black and white solutions and in practice we do not believe either approach is the ‘holy grail’.

Rather each management style can offer benefits within a balanced portfolio. Holding passives can reduce the overall cost of your portfolio (thus increasing your net return) and using managed funds can complement by avoiding “blind” automatic sales and potential downside mitigation.

Whichever route you choose, minimising fund fees is crucial as it is the biggest eroder of returns over time.

When to keep ‘unsuitable’ investments

By Mark Quinn - Topics: Investment objectives, Investment portfolios, Investment Risk, investments in Portugal, Portugal
This article is published on: 20th May 2022

20.05.22

A lot of people contact me believing they cannot keep certain investments. As I said in my article last week, it’s all about the subtleties, so let’s look at some examples.

Individual Savings Account
For Non Habitual Residents (NHRs), interest and dividends are tax exempt during the 10-year period but realised gains are taxed at 28%. For non-NHRs, interest, dividends and gains are taxed at 28%.

If your move to Portugal is short-term, or if you are not certain that it will be your long-term home, then there is a case for retaining your ISAs. Although you cannot add to them whilst non-UK resident, you can continue to hold them, and once you return to the UK they resume their tax-efficiency.

A planning point you may wish to consider if you have a stocks and shares ISA is to ‘rebase’ by selling and then immediately repurchasing the same funds within your ISA prior to leaving the UK to ‘wash out’ any taxable gains accrued to the point of your departure. This way, if you did decide to restructure, encash, or withdraw from the ISA as a Portuguese tax resident in the future, there would be litle or no tax to pay in Portugal.

As a general guideline, if you believe your move to Portugal is long-term (as a rule of thumb, 5 years or more) then restructuring and starting an investment vehicle that is suitable for residency in Portugal would make sense for greater tax efficiency, amongst other reasons. If this is the case, planning well in advance is advantageous, as there is no tax on ISA closure for UK residents.

when to keep unsuitable investments

Investment bonds
‘Non-compliant’ bonds are those that are not officially recognised by the Portuguese authorities. Usually all premiums paid into ‘compliant’ bonds are taxed, albeit at a very small amount. This effectively registers their tax favoured status and guarantees the tax breaks, assuming all conditions are met.

There may be a case to retain a non-compliant structure if you do not intend to make withdrawals because there is no tax to pay if nothing is taken out. However, you should still review the plan as there may be lower cost or newer options out there. If you do withdraw funds, we have seen some non-compliant bonds benefit from the same tax treatment as compliant bonds, but there is no guarantee.

Encashment would be a good idea if the policy originates from a blacklisted jurisdiction as tax on gains is punitive at 35%, rather than 28% or less depending on how long the policy is held. Also, if you want to guarantee the tax advantages and policy qualification, you will want to ensure you are holding a Portuguese compliant product. Other points that might affect the decision are how succession laws are affected, policy flexibility, currency and fund choice, and the consumer protection offered.

UK pensions
Pensions are a more complex area of planning and if you get it wrong, it could have consequences for your future lifestyle or ability to support yourself in retirement.

You should always seek personalised qualified advice when addressing your retirement planning, but as some food for thought:

You may wish to retain your UK pension if you have no lifetime allowance issues or do not plan to take withdrawals during your lifetime. Again, you should still review the pension regularly. You might look transfer to an EU based scheme if your total pension benefits are close to, or more than, the UK lifetime allowance (currently £1,073,100), or you are concerned about currency fluctuations and want certainty. You might even withdraw completely if you have NHR, no UK Inheritance Tax or succession planning considerations and want tax-efficiency post-NHR in Portugal.

There are of course many other investments or structures out there such as premium bonds, EIS, VCTs, trusts, QNUPS etc. that may or may not work for you in Portugal and I suggest you discuss your options with a qualified and experienced professional.

Investment portfolios | The Principles of Success

By Mark Quinn - Topics: investment diversification, Investment objectives, Investment portfolios, Investment Risk, Investments, investments in Portugal, Portugal
This article is published on: 18th May 2022

18.05.22

The world of investments can be intimidating, even for the most seasoned investor. Here, we will put aside the jargon and push past the hype of ‘the next big thing’, and instead focus on the key principles that every investor should know when building a portfolio of investments; irrespective of how engaged or involved you wish to be.

Ideally, you should look at your assets as a whole – your pensions, property, savings and investments, rather than at each area or structure in isolation. This way you can apply the principles to your wealth as a whole and be in the best position to potentially meet your financial objectives.

Asset allocation is key to investment success
Asset allocation is the percentage of each type of asset class making up your overall investment portfolio. In turn, asset classes are groupings of similar types of investments such as cash, equities, commodities, fixed income, or real estate.

The key principle behind asset allocation is to include asset classes that behave differently from each other in different market conditions to reduce risk and generate potential returns. For example, if equities are falling in value, certain fixed income assets may be rising.

The goal here is not solely to maximise returns but to blend your holdings to meet your goals, whilst taking the least amount of investment risk. The right allocation for you will depend on several factors such as your willingness and ability to accept losses, your investment time frame, and your future needs for capital – unfortunately, there is no one size fits all.

Many studies have shown that asset allocation is the most important driver of portfolio returns, so getting this first step right is critical.

Diversification to reduce risk
Once you have decided on the right asset allocation for you, you must then pick the individual types of holdings or investments within each asset class. Each asset class is broken down into subclasses, for example, fixed income includes holdings such as fixed deposits, gilts and government or corporate bonds.

It is not enough to simply own each type of asset class; you must also diversify within each asset subclass. For example, taking corporate bonds which is a type of fixed income asset class, you can hold them in many different types of companies, industries, currencies, countries, or long or short term.

Rebalancing
As assets perform differently over time, the initial percentage asset allocation will deviate over time. A typical example is the huge increase in the US stock market over the last couple of years which, whilst good for investors’ returns, will have increased the level of share exposure. This increase in the value of equity holdings because of the sustained rise will lead to increased risk across the portfolio as a whole.

This can be solved by regular rebalancing to ‘reset’ the portfolio to your original asset allocation. This involves selling holdings that are overweight and buying ones that are undervalued.

Rebalancing also provides the ideal opportunity to revisit your financial goals and risk tolerance, and to tweak your asset allocation accordingly.

investment portfolio

Long term perspective and discipline
As humans, our emotions can lead to poor decision making when it comes to investing. Decisions that seem logical in daily life can result in poor investment returns, with many retail investors selling through fear at the very point they should be buying at lower prices, and conversely, buying at much higher prices during a gold rush.

It is vital for most investors to keep a disciplined approach as it is easy to get caught up in the daily noise of the markets.

Minimise costs and maximise tax efficiency
Einstein described compounding as the 8th wonder of the world and the effect of compounding applies to fees. A charge that might seem small at the beginning can turn into a significant cost over time and research has shown that lower-cost funds tend to outperform in the longer term.

As a simple example, assume a €100 investment and no growth. After 10 years, an annual charge of 2% will result in €82, a 0.2% charge would result in €98.

Focus on minimising fund, structure and adviser fees. In the world of investing, more expensive does not necessarily mean better.

Tax is an often-overlooked cost, which if minimised can lead to the same positive compounding effects over time. This is done by ensuring that your investment portfolio is structured correctly for your resident status, and it might be different planning for normal residents, Non-Habitual Residents, or depending on if your move to Europe is for the rest of your life or if you intend to return to your home country in the future.

Withdrawal strategies
If you are taking income from your investments, you should consider the way in which you do this and the order. Not only will this affect the type of investments you hold within your portfolio, but it could also affect how you hold your portfolio and provide tax planning opportunities or pitfalls.

Focus on total return
With interest rates at historically low levels, it is difficult to rely solely on income returns in this investment environment. The total return is a truer picture of performance and takes into account the capital appreciation as well as the income received.

Be boring!
To quote Warrant Buffet, one of the world’s most successful investors: “Lethargy, bordering on sloth should remain the cornerstone of an investment style”.

Do not try to chase returns or the trends in investments – stick to tried and tested assets. At Spectrum, we only use investments that have worked over the long term, are easy to understand, daily tradable and transparent.

5 reasons cash might not be king

By Mark Quinn - Topics: investment diversification, Investment Risk, Investments, investments in Portugal, Portugal
This article is published on: 16th May 2022

16.05.22

In the words of Warren Buffett, “The one thing I will tell you is the worst investment you can have is cash”.

If one of the world’s most successful investors believes this, let’s look at some of the reasons why holding large amounts of cash is bad for long-term financial planning.

Inflation
We all need access to cash for daily spending and emergencies, so it is important that you hold enough cash on deposit for if the boiler breaks! But holding large amounts of cash over long periods is damaging when the interest rates are well below the rate of inflation.

To illustrate this in real terms, if your annual spending was £10,000 in 2011, you would need £12,968 in 2021 to make the same purchases as inflation averaged 2.6% p.a. However, during that same period, the average savings account interest rate was 1.6% p.a. so the same £10,000 in a bank account would only have grown to £ 10,160.

Low-interest rates

Interest rates offered by banks to customers rarely beat inflation, so using this as a long-term savings strategy is not ideal.

According to the most recent data available provided by the Bank of England and Portugal, the average UK deposit interest rate offered in December 2021 was 0.3% and the average rate in Portugal was 0.06% as at December 2020.

With inflation currently sitting at 5.4% and 3.3% for the UK and Portugal respectively, we can see that inflation will rapidly erode the value of your savings.

Taxation
One of the commonly overlooked factors when making any investment is the tax consequence. In the UK there are great tax-free savings vehicles such as ISAs, but here in Portugal, the choice is much more limited but that does not mean that tax-efficient savings are not available.

For those with NHR, there is not so much of a concern as foreign earned interest is tax-free. However, for normal residents, all interest paid is taxable at 28%. Please note, interest from bank accounts held in blacklisted jurisdictions such as Guernsey, Jersey and the Isle of Man is always taxable at 35%.

5 reasons cash might not be king

Investments usually outperform cash in the long-term
Most people feel more comfortable holding cash, maybe because they do not understand the stock market or they are reluctant to seek financial advice.

It is true, investing in the stock market does carry some risk and you will experience volatility which can be unnerving, but over the long-term markets have outperformed cash.

The Barclays Equity Gilt Study 2019 analysed cash, equity and gilt performance from 1899 to 2019 and it found that £100 invested in cash in 1899 would be worth £20,000 in 2019; a stark contrast to the £2.7m it would worth if invested in equities over the same period.

We might not all live to see returns over 120 years, but even with the global health and economic crisis today, many global stock markets finished the year higher than they started. For example, Morningstar’s Global Markets index was up nearly 15% by mid-Dec 2021, whilst banks were offering returns below 1%.

Dividends
Stocks and shares pay dividends in addition to the expectation that their price will increase. Cash only pays interest, and with inflation, there is a near-certain expectation our cash value will erode in real terms over time.

Lastly, what are the alternatives? Simply put, investing. What you should be investing in and where will be dependent on several factors such as your goals and the risk you can, and are prepared to, take. If you would like to discuss your options, please get in touch.

Bonds – still a low-risk investment?

By Jozef Spiteri - Topics: Investment Bonds, Investment Risk, Investments, Malta
This article is published on: 5th May 2022

05.05.22

Are bonds going out of fashion?

Bonds, which are fixed income instruments, are probably one of the most popular asset classes along with equities, and have been used by organisations to raise funds for many years. Because these instruments pay regular interest (coupons), they are attractive to investors, but are bond investments really as good as people think they are?

Let’s begin by defining what bonds actually are. A bond is a debt instrument, meaning that the organisation that issues them, be it a government or a private corporation, is obtaining a loan from the general public. The reason for opting to get a loan from the public rather than a traditional bank is simple; they will pay less interest making it a much cheaper method to finance a project. An example of a bond would be one maturing in 10 years’ time, paying an annual interest rate (coupon) of 2.5%. This simply means that if an investor had to purchase €1,000 worth of this bond issue, they will receive €25 per year for 10 years and they will get the initial amount (principal) of €1,000 back at maturity. The fact that money is being received every year tends to deceive investors. The truth is, for a coupon as low as 2.5% they will just be moving in line with inflation, which has been around 2-3% in recent years and has started to creep up in recent months. This means that with such an investment they are not adding value to their wealth and actually risk losing value.

Investment Bonds

After reading this you might be wondering what investments could help you beat inflation.

Over the past 10 years the asset classes that have performed the best have been US equities and REITs (Real Estate Investment Trusts) (www.blackrock.com/corporate/insights/blackrock-investment-institute/interactive-charts/return-map).

Debt, or bonds, has been one of the weakest performers across the board, and this has contributed to the fall in popularity of this asset class. The best approach would be to invest in a diversified basket of assets with well-established fund managers, with a track record of good returns. This will not only reduce the risk of bad performance and value destruction thanks to inflation, but will also give you exposure to higher returns.

If you are interested in discussing this matter further, or any other topic, feel free to reach out to one of our advisers. We will be more than happy to sit down with you and go over all the questions you might have.

We do not charge any fees for our initial consultations and there is no obligation to proceed further.

Sustainable & Ethical Investment funds in Spain

By Chris Burke - Topics: ESG Funds, ESG investing, investment diversification, Investment Risk, Spain
This article is published on: 25th April 2022

25.04.22

More and more people are contacting me regarding sustainable investments in order to understand the choices available, whether they offer a good return on your investment and would you get any more return if you didn’t invest sustainably/ethically? We all know the planet needs our help but we also want to know that our hard-earned monies are working for us – it can be a difficult emotional trade off.

Sustainable & Ethical investing has hit the world by storm over the last few years. By the end of 2019, professionally managed assets using sustainable strategies grew to $17.1 trillion, a 42% increase compared to two years prior, according to the U.S. SIF Foundation (2021). The organization also estimated that $1 out of every $3 under professional management is now invested under ´´sustainable practices´´.

Recent studies have also shown that Sustainable Investment funds, as well as providing ways to invest responsibly, provide both financial performance and lower levels of risk. For this reason, in part, many deem including sustainable investments in their portfolio is a ‘no brainer’.

Let’s say for example that you are in the market to buy a new dishwasher. You’ve analysed several products and have narrowed your choice down to the last two. Both products cost the same amount and wash dishes equally as effectively, yet one of them uses less electricity and is considered safer due to the addition of extra safety features. Which one would you pick?

ESG Funds in Spain

When comparing the returns of sustainable funds and traditional funds, is there a financial trade off?
A common belief held by investors when comparing mutual funds that are performing to a similar standard is that the one with a sustainable investing model may not perform as well. However, a Morgan Stanley (2019) report has debunked this myth. The report analysed the performance of 10,723 mutual funds from 2004 to 2018 and found that the returns of sustainable funds were in line with comparable traditional funds, stating that ‘there was no consistent and statistically significant difference in total returns’.

When comparing the levels of risk of sustainable funds and traditional funds, is there a trade off?
The Morgan Stanley (2019) report found that sustainable funds experienced a 20% smaller downside deviation than traditional funds, a consistent and statistically significant finding. In years of higher market volatility (such as 2008, 2009, 2015 and 2018), sustainable funds downside deviation was significantly smaller than that of traditional funds. The study took an in-depth dive into in the last quarter of 2018 during which we saw extreme volatility in the US equity markets. Despite negative returns for almost every fund, the median US Equity sustainable fund outperformed the median US Equity traditional fund by 1.39%, and also had a narrower dispersion.

These findings may come as a surprise to many. There is a general consensus amongst investors that by investing in sustainable funds, you will also miss out on financial gains. The research based on concrete evidence of market performance over the past few years suggests that this is not the case, and that there is in fact no financial trade off when investing sustainably. Over the forthcoming years, I believe that the adoption of sustainable investments will continue and that we will continue to see the opportunity gap between investor interest and adoption narrow.

If you would like to speak with an expert on Sustainable and ESG Investments, Chris Burke is able to discuss with you the new investments in this area. Chris is also able to review your current pensions, investments and other assets, with the potential to make them more sustainable moving forward.

If you would like to find out more or to talk through your situation and receive expert, factual advice, don’t hesitate to get in touch with Chris via the form below, or click the button below make a direct virtual appointment.

Sources:
“Sustainable Investing Basics, 2021,” US SIF Foundation: The Forum for Sustainable and Responsible Investment, www.ussif.org/sribasics. Accessed March 24, 2022
“Sustainable Reality – Analysing Risk and Return of Sustainable Funds, 2019,” Morgan Stanley, www.morganstanley.com/content/dam/msdotcom/ideas/sustainable-investing-offers-financial-performance-lowered-risk/Sustainable_Reality_Analyzing_Risk_and_Returns_of_Sustainable_Funds.pdf. Accessed March 24, 2022

Measuring investment performance

By Mark Quinn - Topics: investment diversification, Investment objectives, Investment Risk, investments in Portugal, Portugal
This article is published on: 11th April 2022

11.04.22

There are several different ways of measuring your investment performance, and I will run through some simple tips to allow you to dig deeper into your portfolio.

Firstly, do not forget to factor in fees such as adviser and management fees and structure costs when looking at returns. I have seen the cost of some investments run as high as 4% p.a. through hidden commissions and explicit charges. These have been disguised by strong market performance over recent years, but are likely to be exposed if we experience leaner years in markets in the future.

Simple benchmarking
A simple and quick method of comparison is looking at interest rates on cash accounts. If your investment returns are generating the same returns as cash on deposit, why are you taking the market risk?

Similarly, take into account inflation. If you generate a 3% return and inflation is 2%, your net return is just 1%; is this what you thought you were achieving?

Lastly, look at what similar passive investments have done. These types of funds simply track a stock market index and are inexpensive. If you are paying a fund manager to outperform and add value by trying to achieve higher returns, have they done this?

measuring investment performance

More in-depth methods

Market indices
A market index tracks the performance of a group of shares or other investments e.g. the S&P 500 index which tracks the performance of the largest 500 shares in America. They can be a useful barometer for the ‘health’ of an investment market as a whole but it is important to use them appropriately.

For example, you cannot meaningfully compare the performance of the S&P 500 index (100% shares) with a portfolio that consists only 40% of shares. Similarly if you are comparing a euro denominated portfolio with the US market which is denominated in dollars, then again this is not necessarily an appropriate comparison.

The downsides of using indices as a comparison are therefore addressed by the use of:

Peer group
A peer group allows you to compare investments that are similar in nature e.g. a specific class of investments or geographical region, and because you are comparing “like for like” it can be a more meaningful comparison tool.

Morningstar.com is a particularly useful tool in this respect and can guide investors with regard to an appropriate benchmark and peer group.

Quartile rankings
These are used to compare returns of investments in the same category over a period of time. Investments in the top 25% are assigned quartile rank 1, the next 25% quartile 2 etc.

They can be useful in tracking consistency – what is important is not the quartile ranking in any one period, but they allow you to track trends over multiple periods and time frames.

There is no one way, or right way, to compare performance and you will likely need to combine several measures to get a more accurate reflection of performance. Even more importantly, this should be done regularly to ensure you are doing all you can to achieve your financial goals. Finally, you should take into account the risk you are taking to achieve a set level of return, and this will be the focus of a future article.

If you would like to discuss your performance or how best to build your own portfolio of investments, please get in touch.

Investing During War Times

By Chris Burke - Topics: investment diversification, Investment Risk, Investments, Spain
This article is published on: 7th March 2022

07.03.22

Off the back of the current situation in Ukraine, many of my clients have been asking me what this means for their investment and pension portfolios. Irrespective of the size and scope of the conflict, any declaration of war has global repercussions. Instability in one area of the world will result in a ripple effect, effecting other areas of the world regardless of the countries involved. Yes, this is likely to affect your investments and your pensions but the key takeaway is that you should not worry. If you are panicking, please reach out to me and we can have a conversation about it. There are even areas of opportunity in war times and stocks in certain sectors have even bucked the trend and outperformed. In this article, I will discuss investing in war times, including the current conflict in Ukraine, and the impact that this has on the stock market performance and the wider economy.

The Current Conflict in Ukraine
In the case of the current conflict between Russia and Ukraine, the heavy sanctions inflicted on Russia already have and will continue to heavily effect the global economy. The sanctions are amongst the harshest sanctions ever imposed on a country, and include preventing the Russian Government from accessing up to 600 billion USD in foreign cash reserves which they hold in foreign banks around the world, banning Russia from SWIFT (thus preventing Russians from using various credit and debit cards to make payments) and the freezing of the assets of some Russian individuals around the world ranging from bank accounts, property and even private yachts.

Various multinational companies have also ceased or reduced their operations in Russia (at least temporarily). For example, Apple have closed their Russian stores, Shell and BP have sold their stakes or abandoned their Russian operations and a magnitude of aviation companies such as British Airways, Lufthansa and Boeing have either halted their flights to Russia (note that there have also been significant alterations to the accessibility of international airspace) or in Boeing’s case, suspended parts, maintenance and technical support for Russian airlines.

Stock Market Performance

The conflict does not solely impact the Russian economy. A large number of countries throughout the world export products to Russia. If this is no longer possible, then they will see a reduction in profits, which will then go on to affect their balance sheet. Furthermore, many countries in the world import products from Russia. The key product in this case is oil, a vital energy source. Although the supply of oil has not yet been cut, we have already seen a rise in petrol prices in many countries such as the UK. Other popular Russian products such as vodka are likely to be hit. Due to the decrease in supply, we are likely to see both shortages and a rise in price of Russian products such as vodka.

However, it is very difficult to predict exactly what will happen. For this reason, when making personal finance related decisions it is recommended that you engage in a professional discussion with a professional financial adviser. In times of war in particular, it is recommended that people seek the advice of an expert to help them manage their portfolios.

Previous Wars and Their Impact on Stock Market Performance
It’s important that we consider previous wars and the impact that they had on the stock market. Some civil wars and internal conflicts, such as those in Sierra Leone (1991-2002) and the Central African Republic in 2013, caused severe disturbances in those countries’ economies. However, from a global perspective, these wars did not cause disturbances in the stock market of first-world nations such as the USA. On the other hand, large-scale wars such as World War 1 and 2 did effect the US market, even before the US entered the conflict.

Global markets in the past operated very differently from how they operate today. For example, prior to World War 1 every country operated independently and the countries that operated in global trade were seen as at ‘gold standard’ level. London was the world’s financial capital and used in this way when a financial centre was necessary, however the requirements and responsibilities were very different when compared to nowadays.

At the close of World War 2, significant changes were made to the global financial system which increased interdependence between countries. The World Bank and the IMF (International Monetary Fund) were created, and from then on stocks reacted very differently from World War 1 and World War 2 when conflicts arose.

It’s also important to consider the popularity of the war on the home front and the amount of time in which the war goes on for. For example, the Vietnam War and the Gulf War both saw very different stock market outcomes in the USA due to the difference in popularity of the wars amongst Americans. Furthermore, the Afghanistan War lasted almost 20 years. In this 20 years, the markets saw both highs and lows. Ultimately, the longer a war goes on the less reactive a market is to its influence. A war may start to be seen as a ‘Business as usual’ type of operation.

I created the below table, summarising previous wars and their impact on the economy and stock market performance (I used the Dow Jones stock market as a comparison).

WAR EFFECT ON ECONOMY
World War 1
  • Nations that imported more than they exported lost gold reserves, negatively impacting their economies, because the slow economic conditions saw greater demand for exports
  • When Archduke Franz Ferdinand was assassinated, what is considered as the start catalyst of the war, the stock market was barely effected
  • When Austria-Hungary declared war on Serbia in 1914, the Dow Jones dropped by 30% and the market had to close to maintain order and stability. When it opened a few months later, it sawed up by 88% and continued to rise until late 1916
  • When the US declared War in Germany in 1917, the stock market took a hit and continued trending downwards into 1918. It didn’t recover fully until mid 1919, on the news that the war was over
World War 2
  • The US was just emerging from the Great Depression in 1939 when the war started. In the early days of the war the Dow Jones increased over 10%, offering hope that the geopolitical environment would put an end to the challenging economic times. However, the conflict started to disrupt international trade and after this initial boost, the market started to fall significantly
  • Rapid action from various impacted Governments around the world prevented the stock market from falling further than it did
  • From 1939 to the end of the war in 1945, the Dow Jones was up 50%. Considering the economic conditions, this was a rather unexpected gain. The gain was put down to the various international cooperation agreements which succeeded in stabilising and growing the US economy
Korean War
  • The Dow Jones dropped around 5% on the first day – the war was a shock to most investors
  • The recovery was fast, and by the time the war ended in 1953 the Dow Jones was up almost 60%. This is thought to be due to a number of Government policies such as increasing taxes and not borrowing money to fund the war.
Vietnam War
  • The Dow Jones grew by 43% from the start to the end of the war (1965 to 1973), despite its low popularity
  • However, it was not all plain sailing. The Government’s decisions on funding the war caused inflation, setting off a mild recession in 1970
Gulf War
  • The Gulf War only lasted for 7 months. Due to its shortness, it is more difficult to separate the changes caused by the conflicts from those related to other world events. For example oil prices increased, causing a brief recession, which is an unusual event for war times
  • When comparing the Gulf War with the previous wars, the US economy has changed a lot. The economy changed from processing natural resources and manufacturing capital goods to primarily knowledge based work (producing information and services). This may have meant that the stock market reacted differently during this war compared to previous wars.
Afghanistan War
  • The Afghanistan War lasted for almost 20 years, making it difficult to measure the impact of the war
  • There were two crashes (2008 Global Financial Crisis and 2020 Covid Pandemic) which were both followed by quick recoveries, however these were largely unrelated to the war
  • Industries such as Real Estate, Data Processing and Information Services and Computer Systems design and related services saw huge growth, suggesting that the war did not influence them. Shares in industry-leading defense contractors also profited significantly during the war.

Do any Patterns Emerge from Historical Stock Market Performance During War Times?
In the early days, there is certainly volatility. For example, both the FTSE and the Dow Jones took a dip last week (25/02/22) when Russia invaded Ukraine, however both have recovered since then. Logic dictates that this volatility continues throughout war times, however history has shown that this is not always the case. Yes, during pre-war times and at the beginning of a war (especially if there is no escalation period and the war breaks out suddenly without warning) stocks prices tend to decline due to shock and uncertainty. However, once war begins, history has shown that the stock market goes up, as has been the case with the Dow Jones and the FTSE this week (as of 03/03/22).

Generally speaking, there is no need to panic. Panic selling stocks and investments at the start of a war could prove to be a very bad move, considering that early sharp drops tend to be followed by steady gains. However, it is also important to note that the world is changing and that historical patterns may not play out again in future conflicts. Economics and the way in which the stock market behaves is very complex and depends on a variety of internal and external factors such as earnings, valuation, inflation, interest rates, and overall economic growth. Regardless of world events, investors should maintain proven strategies to protect and grow portfolios. The best way in which you could do this is to speak with an expert, and have your investment portfolio professionally managed.

If you would like to speak with an expert, Chris Burke is able to review your pensions, investments and other assets, with the potential to make them more effective moving forward. If you would like to find out more or to talk through your situation and receive expert, factual advice, don’t hesitate to get in touch with Chris via the form below:

Investing as a resident of Portugal

By Mark Quinn - Topics: Investment Bonds, Investment objectives, Investment Risk, investments in Portugal, Portugal
This article is published on: 23rd February 2022

23.02.22

If you are relocating to Portugal (or if you are already resident here) it is important to carry out a review of your investments to make sure they will be tax-efficient in your new county of residence.

Just because your investments are tax-efficient in one country does not mean that the tax advantages will transfer to another county. There are various ways of investing as a Portuguese tax resident, including directly held stocks and shares, collective investments, trust and pension structures. One structure that is beneficial to use in Portugal, and which is used widely across Europe as a whole, is the investment bond.

The benefits of investment bonds

There are several benefits to using investment bonds:

  1. Tax deferral during accumulation phase – gains within an investment bond grow free of tax, known as ‘gross roll up’. This means you can benefit from compounding and tax is only payable when withdrawals are made i.e. the gains are realised
  2. Low effective tax rates when withdrawing funds from the policy – Only the growth element of any withdrawal is taxable, and further tax savings are available after 5 and 8 years. It is important to note that this preferential tax treatment is enjoyed if you are a Non-Habitual Resident or a standard Portuguese taxpayer
  3. Control of the timing of tax events – the bondholder can control the timing of any withdrawal which creates the taxable event. This can be done to coincide with low-income periods, for example
  4. Investment flexibility and diversification – as income and gains roll up free of tax within the structure, you are free to pursue any investment strategy without being constrained by the potential tax consequences of re-balancing or switching between strategies. Additionally, these structures can accommodate a wide range of currencies, asset classes and fund management styles, such as discretionary fund management, index trackers and self-management
  5. Simplification of tax reporting – You are only required to report and declare any income and gains when withdrawals are made. This makes local tax reporting very simple
  6. Portability – the investment bond structure is widely recognised in other jurisdictions so you do not necessarily have to surrender your investment if you relocate from Portugal
  7. Succession planning – investment bonds allow flexible and certain transfer of wealth to beneficiaries. This may not be possible with other investment types and the default “forced heirship” provisions under Portuguese law
  8. Inheritance tax savings – with the correct planning, holding wealth in an insurance bond could mitigate or even completely avoid UK inheritance for British domiciles
  9. Estate administration – in the event of death, the proceeds of the structure can be distributed seamlessly to your beneficiaries without the need for any formal probate process
Investing as a resident of Portugal

At Spectrum, we can help analyse your options and if appropriate for you, advise on how to set up the optimum bond structure for you and your family, including:

  • How to set up the structure for maximum control and flexibility
  • Selection of a suitable provider and jurisdiction to hold your investment in, being cognizant of the relevant double tax treaty with Portugal
  • Which currency to hold the investment in and advise on the underlying fund choice
  • Consideration of trust options
  • Regular reviews of the structure and investment strategy on an ongoing basis in light of ongoing changes in taxation and investment markets

You can contact me using the form below to find out more on the services we offer and to arrange a free financial consultation.

*Mark Quinn is a Chartered Financial Planner with the Chartered Insurance Institute and Tax Adviser qualifying with the Association of Tax Technicians.