I started managing small company portfolios back in the mid-80s and then, after the AIM (Alternative Investment Market) launched in 1995, I launched an inheritance tax (IHT) portfolio service in 1998 so I have seen a few ups and downs in that time.
After the recent sharp market set-back the question investors should ask themselves is, does history repeat itself? We saw a setback from 2000 to 2002 when the FTSE 100 fell around 40% and AIM by even more, but this was regained within a couple of years and markets enjoyed a steady rise until the financial crisis of 2008.
Markets, of course, witnessed a huge fall in late 2008, the FTSE 100 by 28% and AIM by over 60%. However, in 2009 the FTSE responded with a jump of 27% and AIM leapt 68%; emphasising the importance of not panicking! Of course, well-managed AIM portfolios performed much better than the wider index on that occasion and, in my experience usually do in any downturn.
Again in 2018, as Brexit concerns mounted the AIM market fell around 17% but recovered all of this and more in 2019 with a rise of 19%.
One of the main driving forces for markets at present is the global pandemic.
With the regulator discouraging companies from issuing trading statements and results until the way in which this crisis is affecting their business becomes clearer, we are unlikely to get much of a steer from the corporate sector.
As for economic guidance, it is too early to determine the extent of the damage wrought by Covid-19 or to know how long its effects will be felt for.
Perhaps the most worrying aspect of recent developments for investors is the speed at which companies are choosing to stop or defer the payment of dividends. Such a measure is, of course, no more than prudent as businesses seek to conserve cash to carry them through an uncertain period ahead. The trouble is that this has implications across several fronts, such as pension income, insurance products and retirement income from savings. However, as history has shown us before, there may well be a dividend bounce once this is all behind us.
This year global markets have fallen by up to a third, with some having made some ground back; of course, they could fall further, but my guess is that we may look back in a year or so and realise what a wonderful buying opportunity this was.
So, a reminder that building a portfolio of suitably qualifying AIM shares can deliver a substantial saving in inheritance tax. After two years of ownership, these shares fall outside one’s estate for IHT purposes, saving 40% tax on the value of the portfolio at date of death.
As financial professionals and investors, we know that we cannot be certain how long this unfortunate state of affairs will continue, nor yet ascertain the extent of the damage wrought. But we will come out on the other side and I expect that markets will recover in due course. As Boris keeps saying “We will get through this” and the chance is that history will again repeat itself.
Andrew Banks is senior investment manager at JM Finn