Investment Update – Summer 2020

The disconnect between unstoppable financial markets and deteriorating global economic fundamentals continues to widen as the world maintains its efforts to manage the spread of COVID-19. If anything serves to remind us that the stock market is not the economy, this is certainly it.

The huge stimulus packages put in place by the authorities – for example the US Fed policies measured in $ trillions and the latest €750bn European recovery package – have, in effect, put a floor in place for financial asset prices, creating a tide of global liquidity.

Much of this wall of money – hot off the financial printing presses – is finding its way into global asset markets, pushing many stock and bond prices close to pre-virus highs and, in some cases, beyond.

This apparent resultant steadiness may, on the surface, suggest that things are returning to normal, but financial market professionals know that there are notable lessons from historical bear markets that we must observe. When the authorities put a floor in place (especially via co-ordinated action from multiple central banks) despite dismal news and outlook, asset prices tend to then find the potential to recover, laying the foundations for moving on and this same pattern is presenting.

Meanwhile, in the ‘real world’, it is becoming evident how differing virus containment strategies (to simplify) have led to diverging outcomes between countries eg. US deaths are looking of great concern in comparison to those in Europe, while trends are also worrying in India and Brazil.

On the whole, mortality statistics would suggest, positively, that knowledge on how to contain the virus and slow its spread/impact appears to be increasing. Although it could be argued that perhaps with wiser, older generations being understandably more cautious and sensibly staying at home, they are keeping out of trouble and away from the grimmest category of the published statistics.

Unfortunately, the risk of economic health being placed ahead of the literal health of citizens is a disappointing but inevitable outcome in many instances. When the economic stakes are so high, the show must go on, when perhaps it shouldn’t.

It is often written that the virus has imposed dramatic technological progress and engagement upon us all. The anticipated sedate adoption over  multiple years of home working, Zoom meetings, online consultations with doctors and to some degree  obsolete shopping centres and fully manned offices are just part of our ‘new normal’ when previously they would have been seen as radical jumps. While this is true, the immense polarisation this is creating is leading to a widening gulf between investment winners (Tech, Healthcare, Gold) and losers (to oversimplify, anything else). Having said that, we note that the rising tide has lifted even the losing boats, albeit not by as much.

Markets are knee-jerking to vaccine hopes although for the most part, cheaper, out of favour recovery stocks (‘Value style’) are facing ever greater risks. Zero sales revenue is a new scenario that few, if any, analysts had seriously modelled in recent times, threatening the financial viability of even some big, ‘grown-up’ companies.

This outcome has sadly hurt our portfolios given our long-term tilt to cheap stocks (based on long-term history and the merits thereof) and we have naturally had to make some difficult assessments and cut losses in places as we look to draw a line and adapt where it is the right thing to do.

With Government Bond rates now essentially pinned at zero across the developed world, money has fewer safe places to hide than ever, that is if you wish to receive a return at the same time.

Logically, Gold looks to be the next ‘safest’ place if Government bonds no longer offer a return. This probably explains much of the yellow metal’s ferocious rise year-to-date with related gold mining stocks rising at an even faster pace.

It is entirely possible that a ‘gold bubble’ could follow given the wall of money and long-term fundamental case for escaping debt-ridden fiat (Government-issued) paper currencies like Sterling, Dollar etc. over the decades ahead. That said, perhaps the gold market might have run a bit hot in the near-term and progress with a vaccine could certainly reverse the sentiment for ‘fear assets’. Nothing ever moves in a straight line.

Back in Britain, the authorities are desperately looking to stem the leaks from the bucket by plugging dozens of multi-billion pound holes with economic stimulus. It certainly seems far too early to worry that the bucket will overflow pushing up inflation. However, Brexit concerns are still afoot and the usual late night poker antics are surely inevitable at the negotiating table while the political stakes remain so high.

The FTSE 100 index continues to prop up the table of global stock indices given its multiple out-of-fashion characteristics and highlights the importance of having a global investment portfolio.

In conclusion, the risks of being very right or very wrong are higher than ever and we are unwilling to take big bets on the future market direction from here and instead are seeking appropriate ways to hedge against varying scenarios.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.


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