If the recent economic situation has created a liquidity need, credit can help maintain your long-term portfolio strategy until the market recovers.

The economic fallout from recent market volatility has been severe, with liquidity shortages and market selloffs leading to disruption in income and carefully planned portfolio strategies coming under threat.

Key messages:

  • Use existing or new credit lines to borrow rather than sell long-term assets.
  • Credit can support your lifestyle or business needs until markets recover.
  • Avoid crystallising losses and disrupting long-term portfolio planning.

Typical cash flows (including dividends, rental yields, bonuses and executive compensation) are suffering, and many people are relying more on long-term financial assets to support their businesses, fund their lifestyles and pay taxes and other expenses they can’t defer. By using credit, they can get what they need most – time.

Protect your long-term goals

The below diagram illustrates the ways many of us think about our wealth by splitting it into four buckets: spend, divide, preserve and grow. In the current environment, reduced portfolio income or business revenue often means the spend bucket has dried up. This places pressure on assets in the preserve and grow buckets to provide this income – which they struggle to do. Instead of selling these long-term assets, you could use them as collateral and borrow on a credit line until income returns and markets normalise.

For example, a client’s UK retail business recently came under increased pressure when it had to close due to lockdown measures. The owner drew down $20 million on a long-standing (already approved) unused credit line to cover costs and help the business stay afloat until it could reopen. This strategy prevented the business collapsing and meant the client did not have to sell long-term assets, which they used as collateral for the credit facility instead. When their income returns, they’re aiming to repay the credit line over time as their business cash flow returns to normal.

The infographic shows how many of us bucket our wealth: spend, divide, preserve, grow. The current environment has caused the spend bucket to dry up for many and places pressure on the preserve and grow buckets. Instead of selling these assets, borrowing / credit can help with income until the market settles, without disrupting your long-term portfolio strategy.

Loss of dividend income reduces liquidity

Dividend payouts have been under scrutiny during the Covid-19 pandemic as whole sectors are in lockdown and thousands of workers furloughed. Companies are under pressure to reduce or cancel dividends to:

  • secure the future of their business;
  • prevent a public backlash for inappropriately rewarding shareholders; and
  • comply with regulatory and government pressure.

For anyone who relies on the dividend income from their investment portfolio, this reduction could cause immediate liquidity issues.

Macro support and recovery

We have seen strong action from central banks like the US Federal Reserve, the European Central Bank and the Bank of England, with policymakers stating their intention to support the economy and maintain exceptionally low policy rates for years to come. Alongside promising signs that the virus infection rate is slowing and the gradual lifting of lockdown requirements, these measures have helped stock markets rebound from their March lows – but they still remain below long-term expected returns.

Selling financial assets during a time of high volatility and uncertainty risks crystallising losses and jeopardising the ability to capture future gains. Instead of selling assets, you could use credit as a tool to buy time – avoiding disruption to your portfolio’s long-term expected returns and locking in losses. Once markets stabilise and income returns, you can repay the loan.

The chart shows how investor perspectives would vary depending on when they entered the market, with the example of investing in a balanced portfolio without alternatives at the start of 2018, start of 2019, one year ago and since the start of 2020 compared to the expected return on the underlying portfolio. If you only started in 2020 you would experience a dip only 2 months in, but over the longer-term things smooth out, which is why it is important to remain invested for the long-term, and not be thrown by short-term volatility.

The chart above shows how investor perspectives would vary depending on when they entered the market, with the example of investing in a balanced portfolio without alternatives at the start of 2018, start of 2019, one year ago and since the start of 2020 compared to the expected return on the underlying portfolio.

We design investment portfolios to withstand periods when markets become more volatile. Taking J.P. Morgan’s long-term capital markets assumptions together with current low credit and funding costs, it makes sense to use credit in the short term to maintain long-term wealth management goals.

Using credit can help you avoid crystallising losses and disrupting your long-term wealth management goals.
J.P. Morgan Private Bank is here to help you understand your wider financial situation and potential needs for liquidity. The discussion should be centred on providing credit to help you through this unprecedented period – buying time to rectify your financial situation without having to dislocate your long-term plans.