In a world this crazy, this is pretty crazy. The value of the investment portfolios are broadly the same now as they were in March 2019.
How can this be you ask? That’s a heck of a good question.
We think an amalgam of contributing factors are playing a part, so this blog will attempt to run through some of the main ones.
Before we start though, I must apologise that although The Badger was due to return in ‘ From China With Love’ that’s regrettably been put on hiatus due to difficulties in production. I can reassure you that the next three blogs will be the aforementioned, followed by:
‘The Shares That Loved Me’
And
‘Casino Wuhan’
The wealth effect
People will spend more, in general, when the big assets they own are rising in value. As consumption increases, economic growth is then stronger so the value of assets go up more. It’s a good news loop.
The two main drivers of increasing wealth and ‘feel good factor‘ for individuals are their houses and their savings. The importance of stock market investments to this ‘Wealth Effect’ have become increasingly important and Central Banks understand that protecting the housing and stock markets goes a long way to encouraging consumption.
Pensions are heavily invested in stocks, both company and personal, and as savings rates have fallen so individual stock market investing has risen.
Most pension funds need to achieve annual returns (hurdle rates) of 6-7% to meet ongoing liabilities and this means owning equities.
It’s therefore no surprise that Trump constantly talks up stocks, a rising market is a stronger economy and happier electorate.
It’s easy to assume that downturns in market fortunes cause major amounts of investment funds to get withdrawn, but that’s not the reality. The ‘HOT’ money leaves but the majority stays in because it’s for pensions or long term personal investments. The people (funds) managing money will continue to invest in equities if mandates so instruct. What occurs therefore is a rotation within the market to the assets seen in the current situation, as safest or most advantageous.
The ‘COVID’ investment truths?
- Anything involving out or indoor crowds is really bad
- Anything remote, so Internet/technology is good
- Most things medical are good
- Anything else is less good
- The stronger the balance sheet the better
So the market has raised Amazon by +30% and reduced EasyJet by -65%.
The point is, that in the main, the money in the market has certainly moved around but not left. This in turn, can cause over-valuations in the most crowded asset classes and we suspect this is happening. Equally, the unloved sectors are currently very cheap, in some cases deservedly but not in all.
How big is Microsoft?
The new moniker for the big US tech companies is MAGA.
Microsoft, Apple, Google, Amazon.
The biggest of the 4 right now is Microsoft, but it was Apple until recently. ALL are behemoth big.
To emphasise their scale:
The value of UK FTSE 100 companies in total is roughly the same as ……… Microsoft alone.
Yep, that’s right, Microsoft is the same value as ALL the biggest 100 UK companies combined.
So going back to the Investment Truths, let’s look at Microsoft in those terms.
Main business areas
- Cloud Computing
- Software
- Office remote working
- Gaming (they own X Box)
Balance sheet – massive cash reserves.
A home run of what you’d want as a post Covid investor.
The other 3 are pretty much variations on the same themes.
M.M.T and the 2 Tsunami
Modern Monetary Theory (stay with me it’s not going get boring) is the idea that the amount of debt taken on by a Government which has its own currency printing press doesn’t actually matter terribly. No default risk exists, it prints its own money.
The concern of inflation is recognised, but arguably it can be dealt with (if I explain how, that is sleep inducing) So M.M.T economists are saying that Governments are free to ‘have at it‘ and increase borrowing levels with no urgent need for austerity and balanced budgets. It’s not a theory universally agreed upon however, to put it mildly.
This plays into the ‘2 Tsunami’ concept and the monetising of debt.
Unemployment and business closures are a coming wave of cost. The ‘mahoosive’ financial injections of cash being hosed over economies by governments is equally a coming wave of stimulus.
They both are Tsunami-esque in size and will collide with costs to individuals and companies offset by furlough programmes and corporate cash grants. So these two huge waves crash together, the question being then, which is more powerful? Time will tell but what’s absolutely apparent already is the intent of Governments and Central banks to do whatever it takes to ensure their wave of mitigation is big enough.
A silver lining revisionist historical retake; we can thank the Great Financial Crisis for the speed and magnitude of coordinated actions by Central Banks. They learned from 08/9 to go fast and go big.
Monetising the debt
This is simply the process of a Government issuing new sovereign debt (borrowing) and their central bank then buying it up as part of QE. The central banks print the extra money and rather than giving it directly to Governments they purchase the new debt, which amounts plainly to the same thing in effect.
So how independent of governments are some of the big central Banks now? In the case of the US and UK as 2 examples, then currently they’re pretty much in lock-step, which leads us on to Europe and Germany.
Europe is in trouble
The fault line of the European Union has always been that Germany has zero wish to act as a paternal financial partner; it is unwilling to assist indebted countries. It simply won’t do it, which means that Europe is a trading block with a single currency but not a true financial Union.
This reality was exposed during the financial crisis and was uncomfortable for a period but died down. It’s about to get super charged though with Spain, Italy, Portugal, Greece and France in serious need of massive assistance. If the Germans ignore them this could fracture the Union. I was never a leaver but equally I was unconvinced that Europe was strong enough to withstand a major financial stress test of solidarity.
If Europe doesn’t come together and Germany doesn’t pony up the cash, then it’s not clear how well it gets through this.
The European stock markets have lagged in performance since this crisis began.
Its all about when
The ball game with this whole situation is the timeframe to get back to nearer normality. The longer and more severe the disruptions, the greater the costs and the risk of business impairments becoming failures.
A problem governments have going forward, is having gone ‘project terrify’ to get people to isolate, it’s tough to ask them now to forget that and just crack on.
There is a truly epic medical effort underway to find therapeutics and a vaccine and if these come online more quickly than projected, then it’s a huge huge win.
Remdesivir is already proven to work to reduce severity of symptoms, blood plasma treatment in Italy is producing strong results and at least three vaccines are already in production at scale.
Current trials indicate that results so far offer a real perceived potential of successful outcomes. The tsunami of stimulus will be, if these are forthcoming quickly, quite possibly in excess of what was needed and we’ll see a stronger uptrend in asset prices.
Conversely, if solutions prove illusive and/or there is the need to isolate again, then everything becomes far more damaged and mitigation costs expand further.
Conclusions
The question of market valuations relative to the current state of economic disarray is vexing the great and the good. Some say it’s crazy high, others that it’s pretty logical.
We think that one of those views will prove correct and what’s more we are 100% sure about that.
But what we also know is that markets rise about 90% of the time, they are hard wired to go up because they are connected to progress and growth.
If an exogenous event slams on the brakes for a while then they will fall, but if interest rates are at ZERO and Central Banks are providing unlimited support to liquidity, then they’re not going to fall anything like as much.
All could get worse from here and it could take longer than most believe to find solutions.
But it may not.
We could nail therapeutics and a vaccine quite quickly and then …… well, it’s ALL going up a lot.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.