by Rebecca Stein
COVID-19 has caused many people to lose their usual income streams and turn to alternative sources to replace that income and keep them afloat.
The pandemic has caused a great deal of uncertainty for investors. Markets have lost a significant amount of value since the beginning of February. Response from the central bank has helped to keep the economy afloat, but the markets remain significantly lower compared to the start of the year.
With companies suspending or cancelling their dividend payments, any investors who'd normally rely on them are running into problems. In crucial in times like this, we do sometimes need to alter asset allocation to adapt to changes in markets and our clients' requirements.
Proactive communication with clients is key, both to ease their concerns around dividend cuts, and to work with them and financial advisors to conduct cash flow planning to identify if they can afford to take a reduced income from their portfolio, and if taking capital from the portfolio will have a longer term impact on the portfolio expectations.
From a personal perspective, I have noticed that in the short term, this isn't impacting our clients too much, as the lockdown has meant that they've significantly reduced their spending. Regardless, if company closures go on for longer, and companies continue to defer and cancel their dividends, it is important to identify companies and sectors where we think that an income is most likely to be sustained.
We've noticed certain themes emerging. For example, the healthcare, consumer staple, technology and utilities sectors have held up much better for the first quarter and have typically grown in the low single figures year on year.
Companies directly involved in the COVID-19 response have naturally done well financially. These range from companies providing the NHS with personal protection equipment to healthcare companies who are involved in finding a vaccine.
With people no longer able to dine out at restaurants and instead cooking at home, coupled with the panic buying which we have seen, supermarkets and online retailers have also done extremely well. In fact, profits could be higher than compared to pre-COVID-19 expectations.
For the industries not doing well, it's important that we work with our research analysts to review company balance sheets and identify companies with sustainability of cash flow and high dividend cover - this is key in identifying the likelihood of income sustainability.
At the time of writing, there are many possible outcomes as to how the situation will play out and it remains unclear as to how long companies will have their doors closed and what impact this will have on both share prices and dividend payments. In my opinion, duration is more important than severity. Governments will help companies survive in the short term, but furlough schemes and business rate holidays are just ‘keeping the lights on.' What is crucial is the length of this lockdown and how companies will adapt to the new normal and how quickly their finances will recover when the economy eventually returns to business as usual.
Rebecca's career in financial services began in 2011 when she took a keen interest in the stock market. Rebecca joined the Charles Stanley Oxford investment management team in 2015, having completed the Level 7 Masters in Wealth Management and is now a Chartered member of the CISI. Rebecca's passion is building bespoke portfolios for clients, she has a particular interest in ethical investing. Not only does Rebecca enjoy the technical side of the role, she enjoys building long lasting relationships with clients and professionals.
