“A stumbling block to the pessimist is a stepping-stone to the optimist.”
– Eleanor Roosevelt, Former First Lady of the United States of America
It seems appropriate that April’s commentary coincides with Spring and a sense of new beginnings, as we begin to emerge from lockdown. No doubt there will be many challenges as society manages its way through the lasting effects of the last 12 months but equally there will be new opportunities for investors to consider in the years ahead.
Earlier in the month we celebrated Easter, although not quite as joyful as we all hoped it would be a few weeks earlier, it was a period for reflection that allowed time to think about the strange period we have come through and what might come next. This is a financial story, an economic story, and a human story.
The financial story is quite extraordinary. The stock market tantrums of March triggered by a rise in bond yields seem long gone and by contrast April has been a month of breaking records. Judged by the performance of stock markets around the world, things could scarcely be better. Earlier in the month, the most important stock market index in the world, the United States S&P 500 index which tracks the share price of the 500 largest companies in America, broke through the 4000 barrier for the first time in history. The index took nearly five years to go from 2000 in September 2014 to reach 3000 in July 2019 and now, less than two years later, it has hit an all-time high.
In Germany, the DAX Index of the 30 biggest companies trading on the Frankfurt stock exchange went through 15,000 for the first time ever. The CAC index in Paris also hit an intraday all-time high at 6300.
In the UK, the picture is slightly different with the FTSE 100 index of UK larger cap shares briefly breaking through the 7000 level for the first time since February 2020, but it remains well below its peak. However, another record was broken by the smaller cap domestically focused FTSE 250 index, which also hit an all-time high earlier in the month. Optimism among Britain’s business leaders has hit record levels as the nation moves slowly towards normality. Sooner or later International Investors will cotton on to the prospect that the UK economy will be like a coiled spring this summer. Some financial commentators think that UK large cap shares offer the best investment opportunity in 30 years.
The financial story and the economic story may seem out of step for the moment. This is often the case; but are they? The economic story is much simpler but equally compelling.
April has showered the US with economic good news. The economic recovery looks extremely strong, with the latest (ISM) survey data showing both the manufacturing and service sector readings reaching near all-time highs. Manufacturing surveys have not been this positive in over four decades while the ISM services survey for March came in with the highest figure since it started in 1997, beating expectations by the biggest margin since Bloomberg began compiling economists’ estimates in 2008.
This US recovery has been well supported by President Biden’s recent record $1.9trn stimulus plan and recent monthly US jobs data has also been exceptionally good. Biden now plans to follow this with an ‘American Jobs Plan’ – intended to create millions of jobs, rebuild US infrastructure, and position the US to out-compete China. This additional spending could turbocharge US growth in 2021 and into 2022. With many US states still operating under lockdown restrictions there is yet more economic reopening to come, which should provide a further boost.
America is also doing its best to help the rest of the world. The latest US trade deficit numbers show imports exceeding exports by the greatest dollar amount on record. It is nice of the Americans to buy so much from everyone else at a difficult juncture. An escalating trade deficit is generally a symptom of economic overheating, but there is little risk of active attempts to use either fiscal or monetary policy to douse the fire.
Not to be out done, China muscled in on the record breaking act with publication of GDP figures for the first quarter of the year showing that the economy grew by more than 18%; the strongest performance since records began. The world’s second largest economy has undoubtedly bounced back from the economic shock caused by Covid 19 although the figures are skewed after a record plunge in economic activity in the same period last year when the country went into lockdown.
Stock markets are strange beasts. This time last year, markets had hit lows not seen for years after plunging 35% in a matter of weeks. But now, on the prospect of an economic boom in the latter half of the year and into 2022, markets around the world have been hitting all-time highs. What is the recipe? Take one part pent-up animal spirits, mix with accumulated lockdown savings, pour on lashings of stimulus and serve in a supply constrained glass. Even central bankers are in party mood and have said they will not take away the punchbowl until we have overshot policy objectives.
Data published during the month showed that January global merchandise trade volumes surpassed the previous monthly peak achieved in 2018. The regular round of business surveys indicates increasing confidence in the economic outlook, with many posting record readings. There is growing belief in a “Goldilocks” scenario with the economy rebounding enough to bring inflation back up to the target rate of around 2%, but not by so much that central banks are forced to raise interest rates sooner and more aggressively.
Another record of the unwanted kind was broken in the early days of April. Sung Kook “Bill” Hwang head of a low profile family office hedge fund called Archegos Capital, had amassed a personal fortune of $30 billion but he lost everything in a matter of days. Due to excess leverage and billion-dollar bets on a handful of stocks, via derivatives known as equity total return swaps, his fortune simply evaporated. “This has to be one of the single greatest losses of personal wealth in history.” reported Goldman Sachs. Ironic then that “Archegos” is Greek for “Who leads the way”. More detail in our Investment Committee Minutes; click here.
Mr Hwang was guilty of taking far too much risk in the form of leverage but perhaps the greatest danger facing investors these days is the decision to take insufficient levels of risk. This is the paradox of financial repression, which robs those with cash of their future purchasing power. One pound held in cash since 2009 is only worth around 65p today. And that is despite the low levels of inflation over the past decade. It is also no secret that conventional government bonds offer far greater risk than reward at this point in the cycle. The first quarter of the year was the worst period for fixed interest investors for over 40 years, with negative returns into double digits. The Barclays Long Treasury Index is down over 20% since last August.
Protecting the real value of capital requires risk taking and a measured investment process is of paramount importance. Shares in businesses with growing intrinsic value continue to offer the best opportunities for investors, although this opportunity does not come cheap these days. Some markets are between 20% and 40% more expensive than history depending on the metric you use but we believe that our equity selection is a differentiator and offers substantial long term return potential without the valuation risk associated with the broader market.
The second contender for the greatest present danger is taking too much directional risk; betting on one outcome and ending up on the wrong side of history. Using a rear-view mirror to project the future leads to untold harm at points of discontinuity. There is a high probability that we are currently changing course and exiting such a period. The dynamics within the market are changing.
The past decade has been a period of low economic growth and falling inflation. This equated to prioritising conventional bonds over inflation-linked bonds, a preference for growth over value and for technology over everything. The problem is that in the new regime these could be the wrong trades. The most successful investments thus far this year, have been those companies which are exposed to the reopening of the economy. On the flip side, given the high levels of risk appetite, investors no longer seek the safety of the steady growth offered by consumer “staples”. Since the successful launch of the Covid-19 vaccines, shares in companies that have been subject to disruption over the last five to ten years and that have been materially affected by the pandemic due to their cyclical exposure, have outperformed significantly. By contrast, companies that have prospered over the past decade and continued to do well last year even during the pandemic, have been held back.
Our focus remains resolutely on the long term, and what a post Covid-19 world is likely to look like. We expect structural shifts like remote working, e-commerce, digital engagement, and automation to continue unabated. At the same time, health and wellness, and sustainable living, which have increased in importance in the minds of consumers, will continue to be important themes well after this crisis has abated. Investments in healthcare capacity and green infrastructure are likely to fuel the healthcare and industrials industries for years to come as governments learn the lessons of Covid-19 and look to safeguard national resilience. We see all these trends as playing to the strengths of our holdings and we continue to add opportunistically to positions and explore new investment ideas.
As memories of Eastertide fade and April draws to a close, we can begin to look forward to a Summer of freedom. And as stock markets continue to recover and economies open, there is much to be celebrated but we must also remember the human story. We must remember that Covid-19 is still stalking the world and causing devastation and tragedy in places such as India and Brazil. We must remain vigilant and continue to be careful and follow the rules. We should try to be sensitive to the losses many have suffered in financial and human terms; and we should try to do better next time.
As always, we wish all our clients, their families, and friends the very best of health and good fortune as we all gradually return to something resembling normal life. Our office is now open and is Covid safe and secure, for both staff and clients alike. It is almost back to business as normal and we therefore look forward to welcoming you to the familiarity of face-to-face meetings in Overbank in the coming weeks and months. We are, of course, available for contact via the office number, email address and all normal forms of communication. As always, please do get in touch if you have any questions.
We look forward to updating you regularly over coming months.
Keith W Thompson
Clarion Group Chairman
Creating better lives now and in the future for our clients, their families and those who are important to them.
Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.
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