Ben Toms

Morning, everyone. Welcome to the first webinar of 2023. Joined here today by Ben Wattam, our investment manager, and Neil Wattam, one of our financial planners, hope you are looking forward to this session and thanks for joining us this morning. The sun is shining over the lake, so it’s good weather for us at the moment, I don’t know about everyone else. Quick disclaimer, before we get started, I’ll be sending the slides around via email to everyone and the video will also be on the website, so if you want to read through this, in your own time, feel free.

A little bit about the structure of the webinar, agenda wise. So I’ll speak a little bit, first of all about the company about us what we’re about what we do, and I’ll pass it on to Neil Wattam who is going to be speaking through a section on financial protection, then we’ll pass it on to Ben Wattam, who will be giving a little bit of an outlook of investments for 2023. We’ll have a little designated Q&A spot. So if you have any questions during the session, feel free to use the chat box, and we’ll get those answered. And the next steps will give you a bit point of contact, some contact details if you have any questions, you can get in touch with us.

So about us, we’re a Financial Planning and Investment Management Company. Here’s a picture of us all with our cheesy grins. It’s an up to date photo so we are now a team of seven, with Neil on the left, then we’ve got Ben, our investment manager, Adrian Mee who’s a financial planner, Daniel Partridge, another financial planner, Laurie G, our Operations Manager, myself as an admin and last but not least, Tim Kirby, another financial planner. The company was founded by the four guys highly professional, with over 80 years of experience now between them all, ranging from financial planning, to pensions and investments, I suppose the main thing is, we will love what we do on a day to day basis. So we love communicating with clients, realizing what your goals are, and helping you to achieve them.

So on to the first segment, I’ll pass it onto Neil Wattam who is going to talk to you about financial protection.

Neil Wattam

Thank you very much. And morning, everybody. So we talked about protection there. It’s about being resilient.
What I’ll cover is a bit of a why you’re here today. So thanks for joining, some options and considerations ultimately to think about. Now, there’s a whole range of aspects to us as individuals, we are complicated beings. And yes, this is just a bit of a reminder that there’s a lot that can happen to us. Now that headlines are often out there with cancer, for example, one in two of us will get it in our lifetimes.
We’ve got 7.6 million people living with a heart condition. So there’s some big numbers out there. But often people think about it, it won’t happen to them or me, we tend to think we’re somewhat immune to this stuff. So this is not a scare mongering thing. It’s just a bit of a perhaps a reality check. That there are things that will happen. And thinking about it from your family’s perspective as well as yourself. It’s worth re visiting what you’ve already got by way of protection or financial position. So if someone in the house in your family gets ill, then you’ll often reach out to other members of family to help with health care, the NHS, fabulous service, but they’re under pressure, as we all know, some of you might have private medical care. So you’ve got potential routes there. So that’s there if you know if you’re particularly ill, but financially, you might have you might be employed, so you might have employer sick pay, but questions are you know, do you know how much that’s worth how long you’ll be paid for? It’s worth doing some homework before the events then finding out later down the line. The state is there. The statutory sick pay SSP. It’s for most people, it’s not a huge amount, 400 pounds a month there abouts for seven months. I daresay most people’s mortgages and other bills are in excess of that. So I guess one it’s there, but it’s not necessarily going to cover your lifestyle or really protect the family much if perhaps one parents say needs to help out and can’t work. And you will have perhaps other employer supported benefits, depending what state offer is probably again worth checking what you’ve got, what would happen, just better to be informed. But I guess it’s a reminder that there are things out there. So just take the time sooner rather than later to look into them. So I guess the point about resilience is looking to how to increase it. Now there’s multiple options. But having cash, we should all have cash somewhere or cash like stuff. Ideally, for several months worth of outgoings easier said than done. But having a pot, there will be hugely helpful. Should you need it. reducing debt is potentially something to look at. Now, depending on what it is, what the interest rates are, how long it is, any costs involved, might not be that easy. But it might be something to consider, in future. Increasing your income, if you have got more income, then hopefully, you’ve got the ability to ride out more storms. But equally, if that income is dependent on a job and you can’t work, then that’s not so going to help too much. And ensuring the risk is another option is what I’m going to talk about in the next few slides. But it is the the first three options here ideas are possibly tricky, in they might take some time. They’re certainly not overnight options. So insurance is there, it is an option. So I’ll run through a few of those. When my mouse works… so we all insure stuff. So we insure cars, houses, businesses, all sorts, but invariably don’t think enough, perhaps about you or your family. So here are four kinds of options that are perhaps more well known, and more prevalent. Life insurance is something that most people would have probably heard of. But it was surprising to me that only 27%, according to direct line of people have life insurance, which is somewhat of a lower number than I might have expected. Whether people really understood what they’ve got, they might have a death in service, for example, through employment, they might not have considered what that really means. Family income benefit is something that is not so well known. But is it really, I think, a really useful and interesting option. Critical Illness is there, which we’ll come on to again, but it’s really there for the severe or more critical illnesses, as it suggests, and income protection, because we all need an income ongoing. So I’ll run through those in order. Life insurance, so this covers death, it does also covered, often terminal illness. So if you’ve been diagnosed with an illness, it’s going to result in an expected debt in 12 months, it results in a tax free lump sum. So that’s pretty straightforward. And you can spend that as you wish, it might be there to cover a mortgage. But you don’t need to do that if you don’t want to. There are lots of options here. And I guess what I’m trying to illustrate with this discussion today is that you can tailor all of these options depending on your circumstances. Whether you’re wanting to insure just yourself or family, you and your spouse, or partners, the lengths can vary. There’s all sorts of options, which ultimately drive the cost. It’s all about the risk to the insurer ultimately. So you can tailor these things as you wish. These slides follow a kind of common theme as this slide you’ll see. But with respect to life insurance, hopefully see on the slide that cancer and cardiovascular diseases are the most prevalent for resulting in claims. And now COVID-19 is in here. This was 2021. So be interested, see how that develops in the future. But it’s probably not necessarily to be as high in future hopefully. But there’s lots of reasons ultimately. And to give people an idea of cost, because we know we’ve got to pay for these things. I’ve picked these out of the air, they’re just for illustration only, but they are real quotes. So for a 41 year old for a 15 year policy. Now you can decide how long he wants policy for with a cover here of two hundred thousand that I’m gonna say just 11 pounds a month. Most people have some sort of subscription where it’s sky, Netflix, Spotify, etc. It’s probably similar to some of those if not cheaper. Someone a little bit older, it does get more expensive. That’s that’s one of the themes here today, that insurance typically gets more expensive. Even for the same type of cover. Now this person will be well into their 60s at the end of the term, but if you died in year one, or year 14 say, you’ll get that 200,000 pounds, depending if you’ve picked a increasing or decreasing level of cover. So it’s quite simple, in essence, it’s probably one of the cheapest. But still, it’s would appear to be under utilized. Family income benefits I mentioned earlier, this is perhaps well, less well known, it’s really interesting from a, it really is there to cover death. Again, it can cover critical illnesses, but it provides an income. So rather than you getting that 200,000 pound lump sum in the last slide, you get an income from that point of diagnosis. You can get a lump sum, but it’s typically not, it’s typically there to provide an income. So if you were to pass away, your family or whoever is left with an income rather than a lump, which might be more useful for their social circumstances. Again, it can be tailored. So it’s similar to the last one with lots of options. I’ve put in a point here that some people may wonder about how how much insurance actually payouts now, this is from Aviva, we’re independent, we don’t use just the Aviva at all. But they had over 99% of life insurance, claims paid out and most big insurance were similar. So you know, they are there, they’re there to do a job and providing you are upfront and honest and that sort of stuff, then there’s no reason necessarily why the claims wouldn’t get paid out. So it is there for a reason, and costs, these are actually very similar to the lump sum option we’ve just looked at. But the benefit here is, in this example, 24,000 pounds a year it’s tax free. And if you were to pass away in year one, you’d get that for another 14 years. If you died in year 14, you get it for that final year. So it you’re not going to get necessarily the total benefit size relative to the last lump sum. But it does provide an ongoing income, which arguably, for more people, it’s useful.
Critical Illness, this is the most expensive option of the four that I’m covering today. And it’s most expensive, like I mentioned earlier about it’s the insurance risk, ultimately, more people suffer from some sorts of critical severe illness than they do likely to die ultimately. So heart related stuff, cancers, strokes, etc. They’re this sort of spear we’re talking about. Typically, there’s a lump sum is paid out tax free, you can have an income paid out. So depending on what you would favor, perhaps in that example, you can choose, it’s tailorable, again, and it can include children. So it’s typically quite a sort of cheap option to include children, and obviously, depending on their age and circumstances. A bit like we talked about earlier, cancer is by far the top condition, but the average agent of claimant, and this is from L&G was 48 is what I would suggest is quite a low age. And costs I mentioned, it’s the most expensive. Again, these are real examples, but they are just for illustrative purposes. You can change the amounts, the terms etc. But they are expensive. And again, it gets more expensive with age. But again, it reflects the risk to the insurer, the likelihood here is higher than death.
And finally, income protection. I’ve mentioned previously that we all need an income to live to do what we want to do. If you can’t work due to illness or injury, then income protection can help out, it pays an income tax free. It can pay a lump sum, but it’s not typical. And there again options to consider. Some more stats, this is done from Aviva. Average age 44. It seems like it’s in the 40s things are gonna happen potentially. And it’s driven by muscular skeletal and mental health again, COVID featured here in 2021. Costs, these are quite similar to the to the life insurance earlier, which might be a surprise and it’s a small typo there it should be 51 year old at the bottom. The point to be wary here, I guess is the deferred periods that means as a period of time that you if you’re ill for longer than that three months or you you don’t basically get paid for that time. It’s about the risk to the insurer. So if you don’t take a payment from them for three months, they’re basically they’ve got three months before they’ll start paying. You can change that to almost any period. Ultimately, the shorter it is the more expensive it is. But income protection is perhaps not as expensive as people might think. So just to wrap up this section And I said it does typically get more expensive with age. Most of us think about the good things in life, we don’t tend to dwell on negative things that might happen. But it could happen, something might happen to you or a family member. Hopefully you don’t need it. Hopefully, it’s something you’ve paid for, and you don’t need. But if you do, then it’s there in that time of need. And for those on here today, who might be a business owner, you can use effectively the business to pay for some personal protection, like relevant life. And also, if you have staff and employees, it can be really useful options to attract and retain staff. Bigger employers typically have a suite of options smaller typically don’t, but there’s no reason why they can’t. So there’s lots of options for you as an individual and potentially, as a business owner. So that’s my section, as Ben mentioned earlier, we’ll be sending out the slides, so you can have a look at a later point. So I’ll pass over to Ben.

Ben Wattam

Morning everyone, I’m gonna spend the next 10 minutes or so just giving you a quick update on our thoughts for 2023. From a markets point of view. And to start, I think the next few years are probably gonna look very different compared to the last few years. And that’s not just from a markets point of view, it’s from an economic point of view as well. And I think you’ve asked people on the call, what’s the best performing economy for the last two years developed market economy? I think few people would have actually said the UK. But it has actually, the UK economy, despite what the media will tell you that was actually performed quite well. These are real GDP figures. So after inflation, so inflation is not included in this. This is from the IMF. And you’ll see that UK is actually performed quite well, from an economic point of view. The real big difference, one big difference we’re gonna have the next few years compared to the last probably decade or more, is that we’ve had a period where the whole world has either been growing or slowing. It’s been really synchronized. I think over the next few years, we’re going to have different economies performing at different speeds. And part of this is because of the pandemic that the world went into 2020 on the precipice of probably slowdown anyway. And because countries have dealt with the pandemic differently, we’re now having different outcomes from an economic point of view. So as you’ll see, some of the the developed nations at the top are going to have a slowdown in 2023, whereas some of the more Asian economies are going to be growing through 2023. So they are building momentum as the developed world is slowing and momentum. And these figures might not be right knowing in the IMF’s, historic forecasts, but it just shows the momentum has changed quite a bit. And you’ll have noticed in that previous slide that the IMF in the US is going to grow us economy’s gonna grow this year, despite pretty much everyone around the world expecting the US and the developed nations to be in recession. I think this is the most widely expected recession on record. And this is shows in this graph that Professional Forecasters in the US more people think we’re getting into recession then than ever before. And usually when people think something’s definitely going to happen, often doesn’t. And the last year of 2022, was really difficult from a markets point of view. And part of that has been the rise in interest rates, the inflation problem, we’ve got in the developed world and the rise in interest rates, but it’s created a really big opportunity we think. And it’s we’ve now seen probably the broadest opportunity set we’ve had for 15 years since the financial crash of 2008. Now inflation still is a problem. We need inflation to come down. But if you look at the yield, you can get on lower risk assets. So the Bank of England moved the bank rate to 4%. But everything else is now yielding pretty attractive levels of return that we haven’t seen for a long period of time. The Bank of England also produced their inflation report last Thursday, their expectation for inflation for the next three years. Average is at 3.2% per annum, which is probably wrong, but this is their expectation. And pretty much every asset you want to buy yields more than 3.2% at the minute. So for the last 10 years, you’ve had an environment where if you’ve not been been invested in equity markets, it’s been really difficult to generate inflation beating returns, the opportunity set now is much, much greater. And that’s why it started this year, we’ve been adding things like corporate bonds to our portfolios for the first time in quite a while. But we do need inflation to fall because inflation is what’s causing a lot of stress in markets and interest rates. This is the Bank of England’s inflation expectations that was published last Thursday. And as you can see, they expect inflation to fall quite sharply this year. And by spring next year, they’re predicting inflation to be 1%. So below target, and they’re expecting inflation then to be below target for the next few years. So this is why I’ve said the outlook for 2023 and 2024, is very different from what we’ve seen in 2021, and 2022. And this, this is reflected in our positivity around markets the next few years. And it’s not just us, this is JP Morgan’s view on assumptions for different asset classes. And this is a long term time period of 10 to 15 years. But you’ll see that pretty much everything is apart from cash is over 3% expected total returns, which we haven’t seen in a long, long period of time. And this is why we think you can probably now invest with lower risk and generating higher returns than we’ve been used to. But this is really positive that there’s so many asset classes now where we can we think we can beat inflation. Now, whilst that’s a positive outlook, we’ve got to get through this next six to nine months, which is going to be bumpy, volatile and uncertain. And part of that is because we don’t really know the scale of the recession that we’re likely to have in UK. And then we might have in the US and Europe. You saw recently that the IMF thought the US was actually going to grow in 2023, whereas 45% of economic forecasters think there’ll be a recession. And this is the Bank of England’s view, on the UK economy, the purple line, so they’re expecting us to have a relatively shallow recession, that will last quite a while. And looking at previous recessions, we’ve said for quite a long time that this recession that we’d likely to have in UK is gonna look very different to 2008, which is people’s last real memory of a recession 2008, everything went wrong. And we went into 2008 in a really bad economic position. Whereas today, it’s a very, very different environment. And I can, I can see that projection being similar to what we expect to happen in the next year or so. And I suppose, when we’ve looked back, the closest we think we are to at the minute is the early 90s. So that you can see the orange line there, the 1990 recession in the UK, the conditions are quite similar to that. And actually 1990 was the last time we had strikes from the ambulance service. It was 1989 to say the strikes and ambulance service, which went into 1990. And we had huge levels of strikes in the late 80s, early 90s. And if you look at what happened with inflation back in the late 80s, early 90s, we had a spike. It’s the last time inflation was over 10% was at the start of the 90s. It was a different environment. From an interest rate perspective, the Bank of England have consistently had interest rates above inflation, and reacted much quicker than what they’ve done today. They’ve reacted really slowly this time, and rates are still quite long way behind where inflation is. However, there’s more similarities in the early 90s. So the chart on the left shows what happened in the US market in the early 90s. In the 1990s, the US market fell quite sharply, it fell by about 20%. However, earnings actually stayed quite robust and then fell in 1991. But they fell much lower than expected. And that led to a rally in the US market. And we can see something similar happening again, this time that expectations for earnings have now become very negative, especially in the UK. And we don’t think the earnings outlook is going to be as negative as expected, which could lead to a rally as we certainly saw in the early 90s. And the chart on the right shows the UK. This is a an average of UK equity funds. And the early 90s was difficult when we were going through that recession. But once we got through that early 90s period, the 90s were really really good period to be invested in UK equity. Now, last year, our probably our biggest underperformance for our portfolios was that we had, majority of our UK equity exposure was in small and medium sized UK businesses This just shows the last one since the start of 2022. The performance in green the bottom line of the UK smaller companies sector versus the large cap FTSE 100 in grey, if you pick the FTSE 250 index, the mid cap index that’s very, very similar to the bottom line as well. And it creates the biggest level of underperformance in our portfolios. And if you actually take the top 15 companies in the FTSE 100. It was basically their strong performance, the rest of the 85 companies really struggled like the FTSE 250. It was top 15 companies in the FTSE that everyone knows whether it’s BP, Shell, and some of the healthcare businesses as well. So we look back at history and this is for last 20 years. The green line is the small cap index. The blue line is the US market, the S&P 500, which many people think is the best performing index of recent times. And then the gray line is the large cap, UK market. And we think that good times can come again, for small cap/mid cap UK, it’s a really dynamic market, the valuations are really cheap. And we’ve started to see quite a lot of merger and acquisition activity in that space. So whilst it was a really painful 2022, we’re optimistic for small and mid cap, especially UK for 2023 and beyond. It’s not just equity, I said earlier, the broad opportunity set that we now have in markets has been caused by the the interest rate rises of 2022. This the chart on the left shows the green line was the performance of the average Sterling corporate bond funds. So if you’d lent money to the average company in the UK, you’d lost about 16% of your money in 2022. All those gray lines is every year since 2001. So you can see how much of an outlier last year was for corporate bond performance. The right hand side is gilts. So gilts performed even worse, if you lend money to the UK Government, compared to the last 20 years, it was a big outlier. And this is why we think bonds are awesome, really attractive. The left hand side shows the yield, you can now get on lending to the average UK company that we can get yields of just over 5% now. We think we can get double digit total returns from investing in corporate bonds for the next couple of years. Much of that relies on inflation. The Federal Reserve have been very, very active and hot on changing their views on where rates are going to end up. And it changes daily. So last week, we had a pretty big rally after the Fed gave some pretty positive comments actually about where interest rates were going to get to. And then Friday, we had the jobs report coming out of the US which is really, really strong. And it’s pushed everything back a bit again this week. So things are changing. And this is why I’m saying we need to get through the next six months to understand where rates get to and what a recession might look like, or how the economy performs. So we expect the next six months to be volatile. But if we have got a slightly longer term time horizon, we think capturing today’s valuations and yields will lead to really decent total returns in the next few years. Now, this is a chart showing how long it’s taken the Federal Reserve to cut interest rates after their last interest rate hike. And as you can see, it’s not taken very long, historically for the Federal Reserve to turn around, change their mind and actually realize that interest rates are too high. Now this time, we think the Bank of England will probably cut before the Federal Reserve because despite the strong performance, the UK economy in the last couple of years, the UK economy has some issues that everyone knows about, whether it’s in the housing market, or just the impact of higher interest rates on consumers. But the Federal Reserve thing is going to stand a bit longer than historical averages on when they found they take to cut interest rates, it’s still not going to be that long, we think it probably be next year rather than this year. Whereas the Bank of England might be this later this year when they cut. But the point is that we’re getting close to the terminal the high rates of interest rates in the UK, US and Europe, the Bank of England might have another one go in them. I don’t even know if they will because their next meeting is not till the end of March. The Federal Reserve probably have a couple more to go. But we’re not far off now. We’re not far off where we need to get to from a rates point of view. We’ve now got inflation coming down as well which is a big positive, but we don’t need interest rate cuts to generate really interesting returns, especially from bond markets. So just to summarize, I’ve said, inflation, hopefully is now peaked in the UK, US and in Europe, and how quickly inflation falls will be really important for the next six to nine months. The opportunity to beat inflation now from an investment returns point of view, is the best we’ve seen in a long, long period of time. The world is going to be very different. Compared to what we’ve seen, we’ve seen a very strong risk on risk off period around the world for the last 10 years, there’s going to be points where you want to be in China, there’s periods where you might want to be in Europe, there’s periods where you might want to be in the US, we’re not going to see that synchronization we’ve seen. We like the UK, despite it being unloved by pretty much everyone else in the world. Valuations are really supportive. And some really, really great businesses in the UK that we think can produce some good returns, and bonds. For the first time in 15 years, we’ve started to add bonds back into portfolios that we think have got some attractive characteristics. So on that, I’ll pause, and we can move to any questions.

Ben Toms

Thanks guys, that was very informative. So we have one question here for Neil.
Q1) I have a life policy but it is not in trust, what impact could this have on my state?

Neil Wattam

Good question, trusts are somewhat misunderstood but one thing would probably be to have a chat later, typically and almost always you can’t move insurance policies into trust after they have been opened. If it is not in trust, then ultimately any payout would just go into the estate and therefore potentially subject to inheritance tax if the estate is in that position.

Ben Toms

Question for Ben.
Q2) Which investments would you avoid in 2023?

Ben Wattam

I think the next couple of years will look different from the last couple of years and especially 2022 where we had a perfect storm for certain sectors. So, energy was a really big beneficiary in 2022, in the start of 2023 already we have seen some quite sharp falls in some of those commodity prices, take oil as a good example and gas prices as well. Those profits that have been generated that you have heard about in the news in the last week from the likes of BP and Shell is very unlikely to continues at those levels. It’s probably one of the few sectors that hasn’t priced in a recession, most sectors, equity markets in particular, around the world have been expecting a recession, that why you saw the performance of the small cap market being so weak. The energy sector is not one of them. The energy market is still quite buoyant and expecting decent levels of profitability which we are just not sure about, so whilst 2022 we didn’t have much in energy and it hurt us, I think 2023 is probably an area that would want to avoid.

Ben Toms

Q3) I can’t afford all protection policies, which should I prioritise?

Neil Wattam

As ever with financial planning, it’s down to circumstances and its quite personal, so there isn’t really a straightforward answer to it however, I guess affordability is a driver and you need to potentially consider about where you are most concerned. Are you more concerned about ongoing bills, which case you might want to consider the income protection or family income benefits, or if you have a sizeable mortgage and potentially maybe one of you in the household is a higher earner then life insurance or critical illness cover to help in the instance of something happening to pay off a mortgage or substantial debt could be helpful. So, no straightforward answer but I guess prioritizing based on your circumstances as best as you can. But just because something is cheaper like life insurance doesn’t mean it should be the thing necessarily for you.

Ben Toms

Q4) FTSE 100 is hitting all time highs, what is your outlook for 2023?

Ben Wattam

So I suppose the FTSE 100 is a bit of an odd index because the top 15 companies are very very different in the sectors they are invested in, the global nature of them compared to the rest of the 85 companies in the FTSE 100.The rest of the 85 performed quite poorly in 2022, but actually they have a much better outlook for 2023, those top 15 names as I said earlier, in the energy and mining sectors are probably going to struggle in the next year or two, so I would suggest that the FTSE 100 as a whole actually might be okay because of those bottom 85 companies, but those top 15 are so large, I can see it struggling, especially on a relative basis compared to some of those other markets and asset classes that were beaten up quite badly last year.

Ben Toms

Perfect, thanks for sending those questions in. The next webinar will be at 10am on Wednesday 3rd May, if you have any ideas and questions on what you want us to cover, we are all ears, so let us know. If you just want a general chat, feel free to get in contact. The deck will be sent to you all via email after this, and you will be able to watch the video back on the website in the next few days. Thank you all for tuning in, and hope you have a good rest to your day.