The Shape of Things to Come?
18 May 2020
To all Financial Friends
Some Recent History
We live in uncertain and turbulent times where we were faced with the strong likelihood of a full blown global recession before the Covid 19 Virus hit us individually along with the world’s economies.
The media usually focusses our minds on the current big issue of the day so we soon forget past events that are still not sorted and which linger positively or threateningly in the background. So what happened to Brexit? What happened to the Russia - Saudi Arabia oil price war? What happened to trade wars between Trump and China? Has global warming gone away? Iran is now at peace with the rest of the world?
Well, here and there, some of these matters have moved forward a little – some back a step or two, but for sure as threats to the future, none have faded. We are so understandably blinded by the Virus news that little else becomes breaking news any more!
We would be unwise to ignore these outstanding issues in considering our investment/pension and ISA holdings today.
History in the Making
Covid 19 is indeed a threat to us and to the world’s economy, yet countries and people are pulling together progressing in a new wave of kindness and co-operation from which good things can come.
So in spite of all the threats and doom and gloom just today the FTSE 100 Index has rocketed up by 4.28% - just in one day! So, what’s going on? Primarily investors are sensing hope that easing of the virus lockdown is on the way. Indeed, some in the UK are back to work this Monday morning. Loosening of the lockdown rules in Italy have been announced and Germany moves in the same direction.
Add to this that the authorities have for several years always come to the rescue through bucket loads of quantitative easing (simply printing money). They have kept interest rates down and taken many actions to stimulate the economy.
Investors take courage from the expectancy that this support will continue. So, every time there is the faintest ‘good news’ up go the markets. The tremor of bad news and down we go again.
Opportunity
Whatever the market conditions there is always opportunity for profit.
Investment in the Stock market can be balanced by holding money across the range of assets from Cash to Fixed Interest holdings to Property and then to Equities. After that there are other strategies to adopt that can move against the normal market and create profit whilst other assets are falling.
This common strategy of mixed asset holdings like the grand old Duke of York ends up neither up nor down – except that in this Covid crisis such a strategy on average, will have lost investors between 15%-20% of their money. This was not necessary if pro-active and knowledgeable market aware advice had been given. See the attachment to this mail for evidence.
The major moves are between equities and fixed interest holdings. When risk and fear arise investors sell equities and pour money into fixed interest (lending to developed Governments and Corporations). The demand drives the price up creating profit. So maybe having a conviction as to where to invest will be beneficial (see the profit achieved by some of our students in the last twelve months – attached here).
There will always be profit to be made even when ‘the market’ falls. Looking 2 steps ahead to where we see the market and investors going has led to success over the last 20 years.
Today, Dr. Peter Warburton –Senior Global Economist at Economic Perspectives….. published a document outlining the potential rise of inflation. Peter has been a long-term friend and speaker at our past events.
In our Course we have flagged up the threat of inflation and pointed towards investments where the yield is linked to the rate of inflation. When inflation bites could there be a demand for such holdings? Demand pushes up the price creating a capital gain while meanwhile the inflation linked yield benefits the investor.
The Shape of Things to Come?
For investors the way the market may moves can be seen by the shape of several letters. Will the market bounce back like the letter V? Will it rise and fall and rise again like a W? Perhaps in the shape of a U lingering in the doldrums for a year or two before rising again? Should we mention the letter L where recovery languishes along the bottom line?
Bull or Bear?
Which are you? Confidence will rise against the input from the authorities – more printed money, more stimulus to support the economy – more debt to pay the nations bills? Rather like selling the family silver to keep us going and never mind the future consequences? You would be a bull and go for equities if you believe this will work – but with a wary eye to make a move as the consequences unravel? Capture profits along the way to preserve cash to buy up future bargain’s as markets fall again?
The Bull could look to specific holdings that may appeal to the investor as recovery occurs? High yielding equity income funds. These will be popular as investors needing income return to the market?
Funds investing in infrastructure? These may rise in value as governments preserve employment by building roads and hospitals, airports and HS2 to keep us employed, earning and paying tax. Better that than having the unemployed supported by government benefits?
Many believe that technology is the way forward so popularity of this belief supports the growth and profitability of this sector. There are funds specialising in this area.
After the fear of the Virus dies down the next worry on the horizon will be global warming? So ethical equity funds will be in demand? ESG stands for Ethical, Sustainable and Governance. Profit while you help to save the world?
For the negative bearish investor then Gilts and Fixed Interest holdings - perhaps Strategic Bonds? Mix with Gold and funds that seek to preserve capital as a main objective? You too, in these unusual conditions today, could be a profit taker and store cash for strategic future buying. Looking back such holdings have returned unusual and remarkable levels of profit. Low risk means low return and other such certainties are no longer certain at all!
The world of money and investment is upside down. Out of the box. Should you be as well?
PLEASE NOTE: A financial or economic commentary like these, are written to explain, interpret or give an opinion on economic events and markets to help readers understand what’s happening and why it matters. Designed to help you make informed decisions of your own by making you aware of opportunities, risks and potential rewards in the market.
