Diversification and tech sector defend against the October effect

Here’s something scarier than Halloween: the Bank Panic of 1907, the Wall Street crash of 1929 and Black Monday in 1987 all happened in October. Market historians dub it the October effect – and right now there is a severe chill rippling through global stock markets.

The FTSE 100 has tumbled to a six-month low, while Germany’s Dax index is trading at May’s prices. Spain’s Ibex index, the worst-hit bourse in Europe, is nearly back to the floor it hit during March, when the country was in the continent’s strictest lockdown. Youth unemployment is soaring, consumer confidence is sagging, and a steep rise in Wall Street’s “fear index”, the Vix, is spooking investors.

Time to panic? Yes, if you are a day trader. But what if your main financial asset, apart from your home, is your company pension scheme?

Here’s the good news. The days when UK pension schemes were 70% – or even 80% – invested in shares, and mostly London-listed ones, are long gone. So when the FTSE 100 “plunges”, “collapses” or “dives” (market traders never undersell hyperbole) the impact on personal pensions is less dramatic.

Take, for example, Nest, the workplace pension for 9.3 million mostly low- and middle-income workers in the UK who are automatically enrolled into the scheme. At some point in the future it could even become the biggest pension fund in the world. When the FTSE 100 fell by 35% from its January peak to its March low, the main Nest fund fell by 22%.

Yet while the FTSE 100 is far from recovering its 7,500 highs in January, savers in the Nest fund are back to where they were. On a year-to-date basis (to 27 October), the Nest “default” 2040 fund is actually up 1.1% – in a period during which the pandemic has ravaged the global economy.

How have those 9.3 million savers emerged unscathed? There are two reasons, one which is reassuring, the other less so.

First, Nest, like most major company pension schemes, is a model of diversification. It spreads its money across mostly multinational corporate bonds, government bonds from around the globe, property and commodities. Just 54% is invested in shares, and of that only a small proportion is in UK shares.

The second reason is tech. The retirement future of those 9.3 million British workers rests less on the FTSE than on the fortunes of the American tech giants – the top four holdings in Nest are Microsoft, Apple, Amazon and Alphabet (Google). Working from home has boosted Microsoft, and lockdown has catapulted Amazon’s sales: its shares are trading at about $3,286 each compared with $1,898 at the start of the year.

Should the sector crack (and there are a lot of investor updates coming from the tech giants this week), then pension investors should be rightly worried. But it would be brave to bet against the likes of Amazon. As lockdowns tighten in Europe, a renewed surge in online spending will play straight into the hands of Jeff Bezos.

In early April, as the first wave of coronavirus was raging, the Guardian interviewed renowned investor Terry Smith, whose Fundsmith Equity is the UK’s biggest retail fund. At the time, Smith recommended savers should avoid panicking and “just own high-quality companies and try to ignore events”. He was right – his fund has made a return of 13% year-to-date.

This weekend Fundsmith Equity reaches its tenth anniversary since launch. Smith is no less or more worried today than he was during the March market crisis. What he is sure about is a great “bifurcation” between winners and losers on the stock market as the pandemic progresses.

And if you want some optimism to counter the October effect, then take another page out of the stock market history book. When the Spanish flu gripped America in 1918-19, killing 675,000 people, the Dow Jones index stood at around 1,200-1,400. Take some solace in today’s grim climate that in the subsequent decade, it quadrupled in value.

Threat to independent brewers is no small beer

Britain’s craft beer revolution kicked off in 2002 when the then chancellor, Gordon Brown, introduced tax relief for small brewers, writes Rob Davies.

Suddenly it became far more financially viable to set up shop from under a railway arch or in a spare corner of a friend’s warehouse. The result was an explosion in independent outfits churning out all sorts of brews, from regular lagers to tiramisu pastry stouts and everything in between.

The trend went mainstream, with global megabrewers buying out independents such as Camden Town Brewery and Beavertown in a process that annoyed some purists, but brought better quality and choice to the mass market.

With the onset of the pandemic, the revolution is at serious risk. According to ale enthusiasts’ club Camra, the number of independent breweries has declined for the first time in two decades. While hospitality firms have received state support, brewers’ begging bowls have remained empty and fresh lockdowns will hit them hard.

It isn’t just the pandemic that threatens them, either. Proposed changes to Brown’s duty relief, set out by the current chancellor, Rishi Sunak, mean the smallest players – those just getting started – would pay more tax.

Big Beer will also be considering how to deploy its relative financial resilience to muscle out the smaller upstarts. Craft beer is at real risk of being drowned by warm mass-produced lager.

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