20 April 2020
Investing involves the risk that your capital goes down as well as up; you may get back less than you invested. The commentary below is not intended as a recommendation for you to personally buy or sell any of the investments mentioned nor to take any investment action whatsoever.
My ‘cautiously optimistic base case’ outlined in my March 9th email that the lows were in was clearly wrong. This was principally because I underestimated the impact of the coronavirus on the behaviour of governments and people.
Nevertheless, one of my key justifications for buying into the weakness was correct: central banks would take huge steps to support economies and, by extension, stock prices. The lesson may be that timing the market is incredibly difficult but buying stocks on weakness is usually a good idea.
We are now left facing extreme uncertainty: the greatest economic contraction since the Great Depression met by unprecedented central bank action. There are reasons to be positive on stocks. For one, there has been and will continue to be a huge increase in the amount of money in the world and, all else being equal, this causes the value of things that are not money - like property and stocks - to increase in price. This seems likely to continue for as long as central banks are highly supportive.
Meanwhile, the extreme economic contraction will clearly hurt companies’ profits. The signs from China are that it will take longer than expected for people’s spending to return to normal. That is bad for countries like the US and UK that rely on consumer spending for about two-thirds of economic activity. This realisation could spark a serious selloff in the coming weeks or months (and I suspect it will), but economic activity will eventually recover.
There will, however, be permanent impacts from the coronavirus. Higher government spending seems an obvious one. I also think we will experience greater economic nationalism (think: more stuff being made onshore rather than in China). These trends were already in motion; now they will accelerate.
The investment implications of the above are generally bad for stocks: one would expect higher inflation (making stuff in the UK and US costs more) and lower growth (increased government spending does not usually improve productivity). The playbook in such a scenario would be to avoid government bonds and to own companies that have strong balance sheets, attractive valuations and make real money (i.e. cash flow).
But we are not in that investment environment yet and we may not be so long as central banks are printing so much money. We live in a system flush with money and things that are not money, like stocks, are valued ever more highly relative to their fundamentals: stocks right now are at a record high relative to their profits.
It may seem like sitting on the sidelines is therefore a sensible strategy but this has risks too: that assets keep going higher while you, and your cash, are left behind. A decrease in the value of cash is a perennial form of long-term wealth destruction – and this risk is more acute right now because the supply of cash is increasing so much.
So, as stewards of wealth, what are we doing?
Sometimes it is best to explain what we do by stating what we do not do:
I hope that’s all helpful in some way.
Health and happiness to you all,
Scott Tindle, CFA is the Founder & Director of Wealth Management at Tindle Wealth Management
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