When the rubber hits the road

Tuesday, 22nd September 2020 07:54 - by David Harbage

Last month’s blog was entitled “Never bet against the Fed” (following the US central bank’s intimation of low rates, irrespective of inflation), whereas the above saying – implying that things have become serious or critical - seems particularly pertinent today, as a second economic shutdown beckons in this and many other developed countries.

We wondered how savers and investors might respond to the prospect of a near 0% return on Cash accounts for the next few years, suggesting that investors in equity (company stock or shares in a business) would take encouragement that the attraction of the most obvious competing investments - cash and bonds – will diminish. Yesterday, HM Government announced that interest rates on National Savings & Investment products would be dramatically cut with effect from 24 November 2020. (For those interested in the detail: Junior ISA goes from 3.25% to 1.5%, Direct ISA from 0.9% to 0.1%, Income Bonds from 1.16% to 0.01%, Investment Account from0.8% to 0.01%, Direct Saver from 1.0% to 0.15% and prize money on Premium Savings Bonds falls by approximately 30%).  

This article is being written against a backdrop of rising evidence of Covid-19 infection – in part a logical result of increased testing of asymptomatic, younger individuals (as compared to testing the hospitalised population earlier in the year) – and the prospect of the authorities deciding to enforce a second closure of much of the economy, both at home and abroad. Be it local or national, of specific industries or indiscriminate, such shutdowns are likely to be with us throughout the winter months and cast a negative shadow of uncertainty for businesses and consumers alike.

Essentially politicians, understandably concerned that their legacy might feature an uncaring response to the pandemic, will err on the side of short term protection of life rather than the longer term impact of their action on the economy (which generates the taxes to fund the NHS, amongst other core structures) and indeed health (as other, more serious disease goes undiagnosed or untreated). It is not for the writer to make moral judgements (and who, reading this, would seek to be in the decision makers’ place?), but it is to be hoped that a country’s political and business leaders are bright and strong enough to make the right ‘head over heart’ calls. One hopes that their advisors - thinking of central bankers, as much as scientific or medical specialists - can impart wisdom which may not necessarily be compromised by requiring popular appeal  

On 28 August we commented that uncertainty surrounding the pandemic and its economic impact was likely to continue to dominate investor sentiment over the remainder of this year and into 2021. The equity markets would seem to have misjudged the mood and capabilities of politicians - and therefore the more protracted economic damage that might result before this pandemic comes to an end. Last month’s Bank of America survey of fund managers had shown increased enthusiasm for share ownership over the summer, along with a notable reduction in those who expect equity markets to suffer an imminent setback.

By contrast, the author encouraged readers to be vigilant to the very real risk of deterioration in the news flow (be it in regard to the Covid pandemic, the US political elections or the Brexit trade agreement). Any of these could be the catalyst for renewed risk aversion – prompting profit taking and a ‘re-run’ of the bursting of the TMT asset bubble which was seen at the turn of the millennium. While an optimist by nature, and not a worrier by temperament, your writer expects equity markets to experience a further setback over the next six months or so.

An anticipation of major global financial dislocation prompts the ownership of gold, as a safe haven asset (increased money supply, US dollar weakness on low interest rates, allied to a pick-up in inflation is supportive for the precious metal) or as quasi-cash. It is to be hoped that the investment horizon will become clearer as we turn into 2021 and perhaps adding a little more equity - at lower prices, post an autumnal ‘shake-out’ - may then have greater appeal. Both traders and astute, active long term investors should possess a plan on how and when to invest – maintaining a flexible approach to take advantage of any opportunities. In addition, if equities falter as we approach October – which, historically, has been a fragile month for stock markets – where might one look to invest?  

Beyond the owners of gold and precious metals (such as FTSE100 mining giants Fresnillo and Polymetal, or AIM-listed pawnbroker H & T Group) or beneficiaries of volatile financial trading (notably via CFD cum spread bet providers IG Group, Plus500 or CMC Markets), there may be increased appetite for firms that profit from weak economic conditions (which may include the insolvency practitioners Begbies Traynor Group and FRP Advisory Group). Besides these positive selections, with many institutional investors having to remain invested in their particular prescribed asset class (or index-determined universe), fund managers may have resort to switching into less economically sensitive industries In which case, well-known defensive companies like British American Tobacco, Britvic, GlaxoSmithKline, Morrison Supermarkets, Reckitt Benckiser, Severn Trent and Unilever come to mind.

More positively, investors’ recent appetite for businesses which appear to benefit from the Covid-19 changed landscape - notably via the internet-facilitated, digital technology sector – appears set to continue. Although the appeal of US giants, like Alphabet (Google), Amazon, Apple, Facebook and Microsoft, typically featuring significant barriers to keep new competitors or industry entrants at bay, is obvious, their current stock market valuation may be difficult to fathom and price volatility is perhaps the only certainty. The 2020 to-date experience of investors in electric car manufacturer Tesla - which has a total market worth of US$418.7bn, as at close of business last night - bears testimony to that. The stock began the year at US$83.8, more than doubled to reach $187 in February, before collapsing to $70 in mid-March, recovering to reach a new all-time high of $515 on 1 September; this month Tesla (which is set to make its first annual profit this year) fell to $319 on the 9^th, and is currently $450.  

Without wishing to ‘sound like a broken record’ in reiterating a basic investment principle, wise investors will regularly challenge their own future expectations of  circumstances, needs and investment opportunities, be unafraid to change their opinions on the announcement of new developments affecting anticipated outcomes, and invariably seek greater diversification when uncertainty increases to comfort any disappointment.

When the ‘rubber hits the road’ (with further economic shutdown, and the expiry of government supportive measures to business and employment, imminent), it may be tempting to jettison unpopular sectors or segments of the market – such as traditional domestic industries or smaller cyclical companies at present. However, looking back on global equity investment over the past thirty years shows that one year’s weakest performer often becomes the following year’s star success and reinforces the merit of diversification across asset type, geography, industry and size. 

Everyone must carry out their own due diligence in terms of assessing what is most appropriate for their particular circumstances and comfort levels – certainly no personally-specific advice or recommendation is made in this blog – but owning conservatively managed, attractively valued (by reference to balance sheet strength as much as earnings potential) equity continues to have appeal to this long term investor.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.