FAQs: Financial Planning During COVID-19 | Part 1


If you watched our recent webinar, we hope you enjoyed it as much we enjoyed putting it together. For those who didn’t make it on the day, you can watch the recording below.

We held a Q&A session at the end of the Webinar and answered as many questions as we could on the day, but we couldn’t answer them all.   Some of the questions were specific to individual circumstances and where this was the case, we should have been in touch with you directly. 

Unsurprisingly, we received lots of questions on the state of the economy and investment markets which we covered in general terms in the webinar, but as you know, we are financial planners and not economists or investment managers.  However, we are constantly in touch with our trusted investment partners and thought it would be useful to set your questions to some of the firms we rely on to manage your investments.   

Look out for your own question, but if it’s not in this issue it may be in our next newsletter which will follow soon.

With the UK likely to be in recession very shortly does that mean that the markets are unlikely to start to get back to their pre-Coronavirus positions or are we likely to see further falls from the present positions?

Aberdeen Standard Investments’ view is that it is almost certain that the UK will experience a recession this year on any reasonable definition of the term. However, it is important to remember that markets are forward-looking and discount the entire stream of potential future earnings. In that context, a couple of quarters of negative growth is painful, but, so long as the long-term earning prospect of firms is not fatally diminished, it is not a reason why markets must remain permanently depressed. Indeed, the fall in interest rates – all else being equal – boosts this argument as future earnings are discounted at a lower rate, which mechanically pushes up prices today.

Jonathan mentioned the bank base rates potentially going negative. What are the practical implications of this?

The Bank of England is considering pushing its interest rate into negative territory say SEI. Many analysts, however, believe this is still unlikely. The motivation for reducing interest rates below zero is to try to spark economic growth through additional borrowing and spending. In theory, lower interest rates would encourage businesses and households to save less, spend more, potentially even take out loans thereby facilitating greater investment and consumption.

In addition, the negative rate at which governments can borrow money allows politicians to spend more, this increased level of spending may bring the recession to an end sooner.

However, negative interest rate policy allows otherwise unsuccessful companies to refinance debt, at lower levels and as such stay in business. A side effect is that these companies may not be successful enough to grant employees pay rises, so while unemployment remains low, so does wage growth.  In addition, lots of uneconomic companies remaining in existence means the most productive companies in a sector are effectively dragged down by being unable to charge higher prices, this could hinder overall productivity, and potentially even economic growth, over the longer term.

What does this mean for you?

Does it mean you would be charged a fee by the bank to save money?

Does it mean the bank would pay you to take a mortgage out on your house?

Perhaps as appealing as that second option would be, the general view is that whilst commercial banks will pay a fee to the Bank of England for money held on deposit, thus encouraging banks to lend this money out to the population, they are unlikely to pass that charge onto their depositors for fear of losing business.

Regarding mortgages, it’s likely we will see rates reduce and potentially this would allow banks to make mortgages more readily available to people they previously would not.

Given the mind-boggling amounts of money the government needs to service the costs of COVID-19 induced expenditure, would the team like to speculate what targets they think it likely the Chancellor will choose to provide the money?

Morningstar says the only thing that is more difficult to predict than market prices is the actions of politicians. It is unclear how the Chancellor plans to pay for the current expenditure. However, it does seem clear to us that the risk of a sharp upward movement in UK bond yields is not currently discount in gilt prices. We, therefore, have a lower than usual exposure to UK government bonds in our portfolios. While the threat of increased taxes could result in a slower UK economy, it is worth remembering that the UK economy is different from the UK stock market. Most of the profits in the latter come from overseas and so these company may not be very susceptible to UK economic weakness and higher taxes as smaller UK companies. As ever the important question is not ‘what will happen next?’ but rather ‘What is currently in the price?’ and what risks/opportunities does this present for investors who are prepared to be patient.

Is there a sense that companies who have historically been high dividend payers using COVID-19 as a cover to cut or cancel dividends?

The answers were very similar across all fund managers, however, Brooks Macdonald said:

There are a number of reasons for companies to have stopped or cut dividends. However, the overarching reason is to retain the funds on the balance sheet and therefore provide an increased element of balance sheet security. In some cases, this was further enhanced by the raising of capital through share placings. 

The UK banking sector for example probably could have maintained its pay-outs however they came under increased pressure from the Prudential Regulatory Authority (PRA) to be lenient on borrowers, both corporate and household, affected by the lockdown, through debt repayment holidays or covenants extensions/waivers. One could argue this was a “pay-back” for the Government bailouts from 2008/09. This meant retaining this extra cash on the balance sheet has helped mitigate some of the effects.

Other sectors have had mixed outcomes, such as the oil and gas sector. With the oil price falling significantly due to oversupply and the standoff between OPEC and Russia regarding production cuts, oil companies such as BP and Royal Dutch Shell saw a significant reduction in their margins to negative levels. However, BP maintained its dividend pay-out level whereas Royal Dutch Shell cuts its dividend by 67%, its first cut since 1945.

The bulk of the commercial property sector has also seen significant cuts in dividend payments as tenants struggle to pay rents or have been given payment holidays.

Would some of these cuts have happened if COVID-19 had not appeared? We think this is unlikely. Have some companies used it as an excuse to reduce what could be regarded as too high a pay-out? Inevitably yes, however, we consider them to be in the minority. The majority of companies, who cut or stopped their dividend payments, we do expect to resume dividend payments later in 2020 or more likely in 2021. It might though take 12-24 months to get back to pre-Coronavirus levels.

Get in touch

Hopefully, this article has answered a lot of the questions you may have had, but we will also be posting a follow-up article in the coming days with some more frequently asked questions.

If however, you would like more specific advice based on your individual circumstances in the meantime, please get in touch with our financial planning team at info@hlfp.co.uk