Episode 326 - On this week's podcast I reveal how different assets perform when equity markets crash. I talk about which assets are the best to hold and which equity markets tend to fare the worst. Whether you are thinking about renting a beach hut or buying one as an investment we analyse the costs involved as well as the variations across the country. Finally, we discuss the little-known School Uniform Grant.
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Haven assets for market crashes, investing in beach huts & school uniform grants
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Abridged transcript - Episode 326
Below is an abridged transcript of this podcast episode and includes timestamps. The people featured in this episode are Damien Fahy and Andy Leeks
Stress test an investment portfolio
This week I want to talk about what happens when equity markets are stressed. So when I talk about stressed conditions, I'm referring to scenarios whereby equity markets have typically fallen by 10% or more, known as a correction. There have been numerous instances in recent history where this has happened.
If you think about what happens in the banking world, some of the largest investment banks and financial institutions perform stress tests for different scenarios to see how assets or markets might hold up. Don't forget that the entire European and US banking system has undergone a number of stress tests to see how it would fare in another credit crisis.
For this part of the podcast I have gone back and looked at some of the more significant periods of market stress and then analysed how different assets have performed during these periods. For 80-20 Investor members I went one stage further and created a stress test tool that is continually updated. The tool can stress test all 2,000+ unit trust funds available to UK investors.
For example, the tool allows 80-20 Investor members to judge how their portfolio might react if global growth concerns rear their heads, or if we get an escalation in the US-China trade war or another wave of COVID-19. The tool can also help members gauge how their portfolio will fare in an unknown Black Swan event.
The five stress test scenarios
The tool stress tests 5 scenarios going as far back as 2018. They are:
Spike in bond yields
Back in 2018, we saw a spike in volatility and we had a bond market wobble. There was panic over rising inflation, which sent bond yields flying higher. This meant bond markets crashed which spooked equity investors and ultimately caused equity markets to fall by more than 10%.
Federal Reserve tightening
In late 2018, global stock markets became rattled when the US Federal Reserve (the Fed) was intent on tightening monetary policies and raising interest rates. That caused one of the worst December slumps on record. The market was only saved when the Fed began loosening monetary policy again. This scenario gives you a very good insight into how markets and assets might behave if central banks start raising interest rates or unwinding QE.
This scenario considers what might happen if there was an escalation in the trade war. So rising tensions between US and China, the real focal point of that was May 2019.
Depression / pandemic
Then, of course, we had the fastest bear market in history. So the pandemic came along in 2020. And we saw most major stock markets fall 30 to 40%. The fear of a depression following the recession really spooked markets. So this scenario provides a good stress test of what might happen if we get a depression.
The final scenario is the reflation trade. So we've seen in recent months, a reflation trade where certain assets have done particularly well (things like financials, value stocks and cyclical) while growth stocks (such as tech stocks) have performed badly.
All five scenarios are still relevant today. Now, I can't tell you how every fund in existence performed in different scenarios, that's what the tool is for and it’s exclusive to 80-20 Investor members. But what I can share with podcast listeners is how sectors performed on average across all 5 different stress tests. The table below summarises those results and is ordered by the best performing asset to the worst performing asset.
|Sector/Asset||Average % return across all five scenarios|
|UK Index Linked Gilts||-0.08|
|Sterling Corporate Bond||-2.21|
|Sterling Strategic Bond||-2.57|
|Targeted Absolute Return||-2.58|
|Global EM Bonds Blended||-2.68|
|Mixed Investment 0-35% Shares||-3.48|
|Sterling High Yield||-5.18|
|Mixed Investment 20-60% Shares||-5.30|
|Mixed Investment 40-85% Shares||-6.89|
|Global Equity Income||-8.09|
|Japanese Smaller Companies||-8.40|
|Asia Pacific Excluding Japan||-8.42|
|Global Emerging Markets||-8.61|
|Europe Excluding UK||-9.27|
|UK Equity Income||-10.24|
|Technology & Telecommunications||-10.63|
|UK All Companies||-10.71|
|European Smaller Companies||-10.85|
|UK Smaller Companies||-10.95|
|North American Smaller Companies||-11.88|
So if you look at the table the worst performing assets were equity assets but that was obviously going to be the case. The assets that made the most money during periods of equity market stress were bonds, alternative assets and currencies.
So one takeaway for listeners is that if they’re trying to decide which assets to include in a portfolio then the above table gives an insight into the level of investment risk associated with each asset type.
The worst performing equity sectors across the five scenarios, on average, were North American Smaller Companies, UK, Smaller Companies and European Smaller Companies funds.
The next worst performing sector was UK All Companies (i.e. funds that invest in UK companies). Now, that might come as a surprise to people because UK investors tend to hold UK stocks because it makes them feel safe. But actually, in a scenario where there is a lot of stress in equity markets and people are panicking then holding UK stocks can be detrimental to your returns. So don't think that just holding UK shares will offer you better protection from a slump in global equity markets. If you look at each of the scenarios tested then three out of the five, (you could argue that four out of the five) emanated from America, but they still had a big impact on UK stocks.
The best performing asset was the US dollar. It is the haven asset of choice for a lot of institutional investors.
Now if we go up the list from the UK All Companies sector (i.e. from worst performing to best performing) then technology stocks are next. Then comes UK equity income funds. Equity income funds are slightly more defensive than their non-income peers because they tend to buy into defensive sectors that pay good dividends.
Moving up the list you've got Chinese equities next, which were down around 10% on average across all five scenarios, then European equities, North American equities, before we get to global emerging markets.
Moving higher, you've then got general global equity funds then you have Asian equities and Japanese equities. Now that might surprise people that global equity funds underperformed Asian equities. Part of that reason could be down to the fact that global funds tend to be quazi-North American equity funds, as some of them have as much as 60% exposure to North American equities. So, clearly, they will behave in line with North American equities.
In stressed equity markets the dollar tends to strengthen as mentioned earlier. If you've got US assets in your portfolio that can be positive once you repatriate their value back into the UK pound. But as the dollar is strengthening against every other currency, including the Japanese yen, then that tends to also be positive for the Japanese stock market because the major stock market indices contain a lot of exporters. So if the yen is weak against the dollar, it tends to be a tailwind for Japanese stocks, which is why they've been pushed up the table a little bit higher.
If you keep going up the list, you start coming to the Mixed Shares funds and those managed funds that have exposure to bonds and equities. Interestingly, what comes next are Targeted Absolute Return funds.
As the table shows, bond funds and managed funds typically lose between 2% and 6%, when equity markets slump. High yield bonds fall around about 5%, more than other bonds sectors, when equity markets fall around about 10-11%. It’s because high yield bonds tend to have some positive correlation to equity markets.
Of the sectors that actually made money, on average across the scenarios when equity markets tumbled, UK gilts, were up 0.75%. You can also see that the euro and the US dollar provided a positive return against the pound.
The second best performing asset across all the different scenarios was gold. Gold is an asset that investors tend to buy when they're scared. So in a stock market collapse gold tends to benefit from the prevailing sense of fear. So that's why gold can help diversify a portfolio.
So hopefully, people have listened to this part of the podcast and taken away the risk tiering of assets to help them build a portfolio. They've also learned that currency exposure can sometimes boost performance while just sticking to UK equities won't usually provide any protection from the worst of a global equity market sell-off.
Beach huts: Renting, buying and investing
How much does it cost to rent a beach hut for a week?
Andy Leeks 23:43
Okay, so moving on to beach huts. I was surprised to hear this one come up in the podcast this week. This is definitely something a bit different to what we would normally do. And funnily enough, I went away a couple of weeks ago to see my folks who live down on the south coast and we were wandering on the beach one day eating ice cream, socially distanced of course, and we happened to look at the beach huts to the right and we started a conversation about them. Do you buy them? Do you rent them? How much are they? Is it a worthwhile investment? So you're going to tell me the answers so I didn't even have to look it up.
Damien Fahy 24:17
Yes, Money.co.uk published the following tables showing the cheapest and most expensive places to rent beach huts.
Cheapest places to rent beach huts (and the most expensive)
|Rank||Beach||Cheapest to rent (per week)||Most expensive to rent (per week)||Average cost to rent|
|1||Mablethorpe beach (Lincolnshire)||£40||£110||£75|
|2||Dawlish beach (Devon)||£103||£103||£103|
|3||Broadsands beach (Devon)||£105||£105||£105|
|4||Dovercourt beach (Essex)||£80||£150||£115|
|5||St Ives bay (Cornwall)||£70||£170||£120|
|6||Porthgwidden beach (Cornwall)||£70||£170||£120|
|7||Swanage Bay (Dorset)||£65||£210||£138|
|8||Pakefield beach (Suffolk)||£125||£150||£138|
|9||Meadfoot beach (Devon)||£140||£140||£140|
|10||Monmouth beach (Devon)||£140||£150||£145|
Most expensive places
|Rank||Beach||Cheapest to rent (per week)||Most expensive to rent (per week)||Average cost to rent|
|1||Wells beach (Norfolk)||£280||£750||£515|
|2||Herne Bay beach (Kent)||£455||£476||£466|
|3||Mudeford Sandbank (Bournemouth)||£219||£650||£434|
|4||Tankerton beach (Canterbury)||£300||£560||£430|
|5||Abersoch beach (Caernarfonshire)||£125||£690||£408|
|6||Southwold beach (Suffolk)||£185||£560||£373|
|7||Ferring beach (West Sussex)||£250||£420||£335|
|8||South Strand (West Sussex)||£290||£330||£310|
|9||Durley Chine (Bournemouth)||£90||£495||£293|
|10||Walton-on-the-Naze beach (Essex)||£205||£350||£278|
Is buying a beach hut a good investment?
Damien Fahy 26:50
After hearing how much it costs to rent a beach hut some listeners may be thinking that they would make a pretty decent investment. So in this section I analyse the numbers.
How much does it cost to buy a beach hut?
The average cost of buying a beach heart can vary enormously. Typically they vary between £6,000 and £245,000. Recently a beach hut in Mudeford (Dorset) sold for £330,000. Most sites don’t allow overnight stays but if they do (such as in Mudeford) the purchase price is higher.
Demand for beach huts has been soaring, thanks to the pandemic, with prices rising by 41% on average over the last year. Prices vary depending on demand and an infographic of the most searched for locations can be found via the link to the Money.co.uk research in the resources section at the bottom of this page.
Aside from the purchase price, there are other costs you need to factor in. These include:
- a one-off transfer fee - which will go to the local authority and can be as little as £350 or as much as £17,000 pounds. Some local authorities only allow ownership to be transferred if the buyer is a local resident or a relative of the person who previously owned it. So check the rules in the area you are looking.
- a license fee or lease - these can vary between £200 and £1,000 a year.
- business rates - which start from £180 a year. However, you may be able to claim small business rate relief.
- repair and maintenance costs - it is suggested that you need to repaint a beach hut at least every three years because, remember, it’s a wooden structure on the beach that's being battered by wind and waves. So you can imagine that it's going to get a bit tired very quickly.
- insurance - for the building and any contents which is approximately £120 a year
So overall, when I've looked around at the topic, the view from owners of beach huts is that they are things that you buy and keep in your family as something to use and you won’t necessarily make any money from them at all. Furthermore, some locations prohibit owners from renting out their beach huts. So there you go, beach huts are not the best investment but perhaps a pretty decent holiday.
School uniform grant
Andy Leeks 31:42
Okay, so bringing it back from holidays then and thinking about school and school life. We mentioned at the start the podcast about school uniforms. And so I'm just going to quickly go through a piece that Bronte wrote for the website.
The full article can be read in the resources section below.
Beach Huts - Article by www.money.co.uk
School Uniform Grants - Article by Bronte Carvalho