Stock market and economic commentary - December 2020

“With all the tragedies happening in the world, do not fret, we still have more than a few outstanding humans left paving the way for a better future.” – Elon Reeve Musk FRS, Founder & CEO of Tesla Inc

Edinburgh’s Library of Mistakes holds a collection of more than 3000 books cataloging the financial folly of humankind throughout history. A recurring theme is that embezzlement and fraud rise in an era of low returns and at times of financial and economic stress.

General Gregor MacGregor, a Scottish soldier, and adventurer was perhaps the biggest swindler in economic history. After fighting in the Venezuelan War of Independence in 1820 he returned to Edinburgh and stated he had been given a country in Central America called Poyais. He claimed this was a land of paradise and began selling plots of land. To add to the deception, he cheerfully sold bogus Poyais currency to the buyers of the land for them to spend when they arrived in the country of promise to stake their claim. But Poyais was in fact nothing more than a swampy jungle.

Unbelievably, when MacGregor was exposed as a Fraud in Edinburgh, not to be outdone, he immediately moved to London and then to Paris to continue with his deception.

In more recent times, Barlow Clowes fraudulently promised to generate superior tax-free returns of more than 12% per annum by investing in the safety of UK Gilts. The collapse in 1988 left 18,000 investors losing life savings of more than £250 million. Many investors have also lost billions of pounds through hugely hyped share flotations such as AA, Saga, and Aston Martin. Suspect corporate governance and accounting scandals led to the demise of Enron, Wirecard and Carillion, and regulatory failings resulted in investors losing £millions in the Neil Woodford Funds.

As we approach the end of a tumultuous year, scams, fraud, and embezzlement are on the increase. With cash on deposit losing money in real terms, and the possibility of a new era of inflation, investors are vulnerable to promises of high returns which might subsequently turn out to be unrealistic at best and fraudulent at worst.

Investors’ nerves have also been jangling for most of the year for a host of other reasons. The coronavirus pandemic and lockdown restrictions, the drama of the US Elections, and the tensions of a Deal-No Deal Brexit, which is still ongoing at the time of writing despite the politicians on both sides having more than four years to agree an exit deal, have all caused see-saw stock markets. Yet, despite a tumble in March, we have enjoyed a decade of high single-digit returns from bonds and global equities. With some exceptions, most notably UK and Japan equities, both asset classes are now priced at near all-time highs and this has led to some commentators predicting that investment returns will be lower in the decade ahead.

The outbreak of coronavirus and subsequent global lockdowns will certainly be described as one of the most bizarre, and tragic, events of modern times and for many investors, it has been one of the most challenging. The panic-driven sell-off in the first quarter of 2020 was substantial and indiscriminate with share prices completely detaching from fundamentals, but this year has also seen extraordinary bifurcation within stock markets.

Markets moved swiftly to discount the fact that this Covid-19 induced recession was accelerating existing business trends. Investors quickly separated the long-term winners and losers of the pandemic. Previously steady gains in areas such as e-commerce have been turbo-charged but, while markets may have rebounded, the second wave of the virus has left many cyclical sectors languishing well below the highs for the year. Some companies were already vulnerable to a downturn and some may never fully recover.

This, though, is not an argument for avoiding equities; it is an argument for being selective. Resilience, permanence, scarcity, and sustainability are the qualities required for a company to survive. Good quality companies have survived wars, not just pandemics, and political uncertainty. At Clarion, we look for fund managers who invest in companies that meet these criteria. We accept that we may not get all our calls right, so our Portfolio Funds have a sensible diversification between different sectors and also by geography.

No one can pretend to have all the answers to the questions that have arisen because of Covid-19. The pandemic has had an immediate and massive impact on all aspects of our daily lives. But how will it affect the longer term? Nobody really knows but perhaps there are some clues in what we do know after nearly 12 months of Covid-19.

We know that the world was ill-equipped to cope with the pandemic. Covid-19 has highlighted a social and economic vulnerability far greater than anyone could have imagined. It has affected 73 million people and caused more than 1.6 million deaths worldwide, mostly among the elderly. Moreover, some countries have suppressed the disease far more successfully than others.

We also know that Covid-19 has caused a huge global recession but one that has been far from equal across different countries and businesses. This has inflicted particularly serious economic damage on the young, the relatively unskilled, working mothers, and vulnerable minorities.

We know that “social distancing”, partly spontaneous and partly enforced, has damaged all activities dependant on human proximity while benefiting ones that help people stay at home. This has slashed travel, both for business and pleasure. We know that vast numbers of businesses will emerge heavily burdened by debt and many will fail to emerge at all. Intervention by the fiscal and monetary authorities has been unprecedented in peacetime.

So where to next? While many debate the alphabetical shape of the economic recovery to come (V, L, K or W), science and an effective vaccine, indeed a choice of vaccines, have now made the much hoped for V-shaped recovery a much more likely possibility.

With cash and bonds set to yield next to nothing for years to come, we believe that equities, selectively chosen through high-quality investment funds, represent the best home for most savings. As the Covid-19 and political clouds of uncertainty begin to clear, we believe that for investors willing to take a long-term view, the current environment presents a fantastic investment opportunity.

Without normal life’s distractions, people have involuntarily squirrelled away a years’ worth of savings. Never have household balance sheets, in aggregate, improved during a recession. A recent study by Longview Economics calculated that this year’s jump in the savings ratio to 30 percent has increased household savings from around £30 billion to an unprecedented £110 billion. Some commentators predict that we could see the strongest growth in aggregate demand in economic history in 2021.

When vaccination, herd immunity, and ‘moon shot’ testing lift the Covid-19 cloud much of that money will find its way back into the economy. Hopefully, unemployment forecasts won’t prove too gloomy and consumer spending could boom. For some industries and businesses, it could be too late, but many will stage a robust recovery in 2021.

Based on past experience we might expect the Clarion Portfolio Funds to generate on average circa 7-8 per cent a year which doubles the purchasing power of savings over a decade. Naturally, past performance is a guide not a guarantee and if predictions of lower returns in the decade ahead turn out to be correct, a 5-6 per cent per annum return would still be very acceptable when compared with what other asset classes are currently offering.

Of course, no one can accurately predict what the future may hold and returns on capital are only part of the investment journey. We all need a financial compass, a financial road map to guide us through the uncertainties and to help smooth out the bumps in the road ahead. By investing in the Clarion Portfolio Funds and by having the added comfort of a Clarion lifelong financial plan to provide guidance, we can promise that it will be a more enjoyable journey than that taken by the victims of Gregor MacGregor and Barlow Clowes, and, for certain, a much more pleasant destination.

And so, as we approach the festive season and the end of a difficult year for everyone and a sad year for many, we wish all our clients, families, and friends a pleasant and enjoyable Christmas with your loved ones and we look forward to sharing a brighter future in 2021 and beyond.

Thank you for your continued support and we hope you enjoy reading our regular updates.

Stock market and economic commentary – December 2020

Stock market and economic commentary – December 2020

“With all the tragedies happening in the world, do not fret, we still have more than a few outstanding humans left paving the way for a better future.” – Elon Reeve Musk FRS, Founder & CEO of Tesla Inc

Keith W Thompson

Clarion Group Chairman

December 2020

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