Monthly commentary
Watching Brief – April 2020 (m)
Pottering About
I am conscious that the world is changing
fast in many ways as everyone tries to handle the Covid-19 crisis and its
implications at a rapid pace and so any analysis written once a month has a
very short ‘best before’ period!
But I suppose that some analysis, even if you disagree with it, is better than none at all, or a page of bland clichés such as I have seen issued by some advisors!
I have been issuing frequent blog posts reacting to news flow and introducing ideas that I believe are worth pondering on now as a preparation for future action.
Monday mashup – Desperate measures?
This morning a coalition of central banks in the most influential countries in financial market terms has announced a huge package of liquidity support and lower interest rates, yet markets have opened with sharp falls.
This is for much the same reason as when I wrote my blog entitled ‘Fed mis-step?’. The dramatic scale of the assistance package prompts market participants to think that the situation is utterly desperate.
On the other hand, at times like this where there is overwhelming systemic risk, fixed income assets start to lose value rather than offer their usual diversification characteristics, because no-one wants to buy anything. That creates a liquidity crisis, which is rather like throwing a tool bag of spanners into the global financial system. So the authorities have to try and avoid that and their actions today are consistent with that threat.
My current assessment, which of course evolves as the world reacts to the potential progress of the virus, is that equity valuations will keep falling until there is evidence that the drastic preventative measures have worked.
That means that share valuations will likely be the most ‘over-sold’ they have been in my lifetime at some point and if the virus recedes, investors with cash will need to act quickly to pick up bargains.
It has to be remembered that it is the potential threat of a massive pandemic that is driving negative sentiment – the actual number of cases is very small relative to population and the number of deaths is minuscule as a proportion of populations – at the moment. So if the illness caused by the virus is more or less contained within the resources available, which will vary from place to place, the eventual relief will be massive.
Of course, this virus may be the start of a long term fundamental change in human activity. Consumerism has become the opium of the people, succeeding religion in Marx’s aphorism and capitalism is now about 70% driven by consumption. If that falls away permanently, a recession would be truly structural and last a long time.
Such major structural changes are in fact normal – think of how the world differs from that of the Victorian era, the interwar years or even the 1960’s. The current cycle of economic restructuring and resource sharing began in the 1980s in my judgement.
One could propose that global financial systems are in the end always regulated by social or human issues and that the returns to capital had been lately pushed to out of proportion levels relative to other stakeholders, like ordinary people and the environment. That is not to propose that there is better way of managing economic resources than capitalism – just that the balance of interests has been due for a correction for a while.
Watching Brief – March 2020
Pottering About
Defenceless Markets?
I was surprised to see that I had already written about the implications of coronavirus a whole month ago. The dramatic market sell off we have seen in recent days reflects the fact that the spread is now accelerating, in terms of locations, even if the case numbers are increasing less in China.
I have commented on numerous occasions since I launched this web site almost 2 years ago that markets were taking a very optimistic view about profits growth and that the emergence of a significant negative factor that would threaten a global recession would see a dramatic set back.
Whilst it has been possible and indeed profitable to ‘ride’ the momentum a little since central banks did their about turn on interest rate policy about a year ago, the advent of an ‘unknown’ could be expected to force an eventual reality check.
Monday mashup – the pale horse rides out
A reference that those of you with a religious education will recognise as apocalyptic, the rider on the pale horse of Revelation dispensing Plague amongst the weapons of Death. An idea that has not dated much in 2000 years.
I have been preparing material for my March newsletter but all the reference material I have on hand was researched by people looking at data for the last quarter of 2019. There is no doubt useful evidence about the usual changes of direction is asset allocation to be reviewed, but the story that overwhelms all that is obviously the Covid-19 outbreak. The question for the moment is not where to invest, but do we want to be invested in global markets at all?
As a teaser for my March newsletter (subscribers only), I can tell you that the basically sceptical political opinion that I have referred to in the past which in essence is that the US wants a war with China is now being adopted as an economic argument by a well regarded economist. Add to that the locus of the virus outbreak (and the unsurprising propaganda that this is CIA sponsored germ warfare – being tested outside the US for a change), one has to be concerned about the potential impact for markets that are priced on the basis of everything going well or even better than it has been.
In such a situation, I am asking myself, do I want to buy equities with cash on hand? No, to be honest. Do I want to sell existing holdings to secure past gains? A little bit, but I know very well the risks of being out of the market and being scared of getting back in until the best gains have passed one by – I am no less human than anyone else. As long as I have plenty of cash, I am happy to let the portfolio take a hit short term.
What is new is that for the first time in my long investment life I am investing in physical gold, not the actual raw metal, but using exchange traded commodity shares. These are a specialist and potentially risky asset, so not recommended for non-professionals, but there are other ways to access commodity price movements if you see the logic of using that as your diversifier on this occasion. Using funds that invest in gold miners is one way – that also has pros and cons. Something to think about?
Subscribers can call me to discuss this in more detail.
Perhaps the virus will die out quickly like SARS and MERS. I suggest you watch your portfolios more often than usual and if you are using an IFA, get their take on the issues raised. Not my standard guidance and not something that will be good for your neves as a permanent strategy, but these are unusual times.
There is some good news in that the main central banks and political powers appear willing to pump credit into the system. We will pay for that later!
Monday mashup – from Russia with dividends?
As financial writers for UK investors go, I can claim to be in more touch with Russia than many. I am currently sitting in my home about 120kms from the border of the Russian enclave of Kaliningrad. Gas coming into my house is from Russia. My car is often full of Lukoil petrol. My partner speaks fluent Russian and her father is now the last retired Red Army officer alive who was a survivor of the Leningrad siege. If I walk down the road to the local health spa, I will hear the Russian language spoken as much as native Lithuanian. I even speak a bit of Russian and know a few Russian jokes.
On the one hand I perceive as a resident the fierce patriotism of a nation that twice escaped Russian domination (Czarist and Soviet) after great hardship and on the other hand I know that the idea of ‘mother Russia’ as a great nation that can’t be bullied is embedded in the minds of native Russians. In fact, when talking with Russians I feel some fellow feeling about nationality, coming from a nation with similar ideas about its status.
That does not make me an expert on Russian investments of course. It just allows me to better understand how ordinary people well east of the City of London live and react with their economy and politicians.
It is not possible for a liberal minded Englishman to like the way the politics of Russia operates, but equally I don’t like the politics of the Gulf States and even many aspects of the USA at the moment. But it is important to appreciate that as in places like Dubai, many people in Russia tolerate an autocratic government that broadly does what it likes because they are personally getting richer and they feel some patriotic warmth from the ‘strong leader’ story.
In fact, the Russian state has much in common with the Gulf States – autocratic rule, suppression of religion other that the compulsory approved state one, brutal suppression of dissent, an endemic tolerance, even expectation of corruption and loads of oil and gas! Of course many ordinary citizens in both societies are as charming and cultured as anywhere.
Here I come to the investment point: the recent collaboration of Mr Putin with the Saudis seems to have achieved their shared ambition of keeping the oil price up.
This is a relevant point for investors in many ways, but I am making it in this round about way, because a better oil price very directly means a wealthier Russia and that wealth feeds through to the citizens and into the profits of companies that supply that large population. Investment managers specialising in Eastern Europe point out that if you invest in Russia you get both exposure to energy and financial companies that are run in a Western style and ideally not part owned by the Russian state and also a large consumer base that is getting richer. Dividend payouts from some Russian companies are healthy.
The risks of investing in Eastern Europe are many, of course. Currency, liquidity, political and transparency all jump to mind. But as my experience is that investments in this sector move in a rather different cycle to those in India, another economy with great potential for rather different reasons, an Eastern European specialist fund invested for the very long term would be a valid call for more adventurous investors or as a satellite holding for those using the core/satellite approach that I teach.