DIARY OF A FUND MANAGER - HARD GRAFT 27.07.20

This week’s Diary covers the EU’s recovery package, what’s driving markets, inflation, and the quarterly results that matter. At ground level it is proving to be hard graft for people and businesses alike, whilst Africa, despite its size, remains off the radar for most investors.
There was plenty to get excited about in recent days, but the end result for markets was a continuation of the holding pattern that has been in place for a while now. Equities weakened whilst bonds strengthened. Gold continued to move higher (making a new all-time high as this Diary was being prepared) and the US dollar was weak.
Whether the EU dealwill be the first step towards a federal Europe, where the debts of each country are underwritten by all, or the last time that the EU will be allowed to issue its own debt is a matter of speculation. Given the level of distrust between the frugal north and southern spenders I suspect that momentous is an overstatement. A small foothill ahead of mountains shrouded in mist or perhaps just a bit of high ground ahead of the next valley. Only time will tell.
The same goes for inflation. It could happen but because there are no working models, predictions are little more than guesswork. If crisis savings are spent, if governments continue to borrow and spend, if central banks tolerate an overshoot, if de-globalisation damages supply chains on a permanent basis and if the power shifts from employers to employees then perhaps. For now it is no more than a back pocket worry.
Having said that, asset prices are moving higher which could be considered another form of inflation. Strategists have plenty of explanations, but they can be distilled into three broad categories;
  • Investors are looking to a future where growth is in short supply, interest rates low and inflation non-existent. Essentially, a continuation of the last decade.
  • Collectively, we have taken leave of our senses, inflating a huge bubble focusing on a few technology companies, whilst most stocks remain in the doldrums.
  • Excessive printing means that paper money is no longer a long-term store of wealth and so anything else is better.
All are possible which is why observation rather than theory is so important at the moment. This crisis will drive change, not all of it comfortable.
The downside of experience is cynicism which occasionally drifts into contempt. The blame game is of no use when it comes to making a good return. Investors generally accept the present and move on to the future. In contrast, politicians are in their element and so it will be interesting to see who ‘carries the can’ for this crisis. The opening skirmishes have started, but whether the voters will care when they next have a chance to express a view is another matter. Imaginative excuses for getting it wrong are acceptable in normal times, but these are not normal times.
During the next few days results are expected from Alphabet (Google), Apple and Amazon, amongst many others. In the short term what these three report will matter because of their sheer size and, as a result, their influence on indices. To put this in perspective, Amazon, Apple, Google and Microsoft are worth more than the entire Japanese equity market. Each is bigger than the South Korean market which represents the world’s twelth largest economy.
Back at ground level US small business surveys show how much damage has been done. Hours worked are 25% below the pre-crisis level and starting to fall once again, hiring has slowed and 20% of child care facilities are still closed. US credit card spending has plateaued at 12% below the level of this time last year. When the lockdown started, 150,000 US small businesses closed on a temporary basis and 25,000 permanently. Now the balance is 65,000/75,000. In other words, temporary has become permanent for many more than back in March. Paying the bills is hard graft despite government assistance. Those earning less than $50,000 a year pre-crisis are far less likely to have a job than those earning over $200,000 and rising infection rates aren’t helping. Let’s hope a vaccine arrives soon and is very effective. Markets have a way of expressing a view even if unstated. These days there is an index for everything and I am told that the ‘stay at home’ index is still outperforming the ‘reopening’ index.
After last week’s comments about India I was asked why I never mentioned Africa which has a similar population or about 17% of the global total. The US, in contrast, represents just 4% of all of us – but around 60% of the value of global equities, depending on the measure you use. My only excuse is that this Diary is about investment and so economic size rather than surface area or population takes precedence. Nigeria is the largest economy in Africa ranking 27th in terms of GDP – between Austria and Argentina – with South Africa next at number 35. China sees the potential, but others remain absent. Someone I know tried to set up a business in Africa a couple of years ago with foreign capital, but despite many compelling numbers, failed. Rapid change requires a catalyst which for now is absent.
The slow month of August is approaching. Will we find ways to head to the beach literally or metaphorically? Perhaps tradition will be put to one side just this once as we try to restart the world, but I suspect not.

Written by

David Miller
Investment Director

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