June 2020 – Mid Monthly Update
June had seen a continuation of rising prices for risk assets as expectations of a decent economic recovery were underpinned by further lockdown easing in Europe and the US. Just when you thought it was safe to go back in the water, last Thursday’s 6% fall the US S&P500 index reminded investors that the road to some form of normality will be one with bumps in it. Earlier in the day, European bourses had fallen by around 4% on average. Volatility has been subdued of late but can reappear at short notice as the following year to date chart of the Volatility Index (VIX) demonstrates.
Source: Yahoo Finance
The catalyst for the fall was US Federal Reserve Chairman Jerome Powell’s frank assessment of the US economy, which may have been less optimistic than investor consensus. However, Powell also took the opportunity to remind market observers that despite much better than expected employment data, the ‘Fed’ remains in ‘whatever it takes’ mode. Hardly a reason to see risk assets sell off that quickly and government bonds rally. Of course, it is worth pointing out that risk assets have been rallying since the last week of March and may have got ahead of themselves. That could certainly apply to some the beneficiaries of the recent, but so far short-lived, rotation from ‘growth’ to ‘value’ stocks – regular readers will know that we pay little attention to those labels but our references would say that the growers paused for breath while the grinders bounced from oversold levels. By Friday, equity and to a lesser extent, credit markets staged a partial but meaningful recovery. It is not unreasonable to observe that equity markets and risk assets in general, had a bad case of indigestion on Thursday having overindulged recently.
It’s too early to say this is a second wave sell-off but investors will be monitoring recent infection spikes in parts of Asia. Speaking of second waves in the context of Covid-19, it was noteworthy that US Treasury Secretary, Steve Mnuchin said on CNBC, that the US cannot afford another shutdown if a second wave of infections hits the US. Many of you will have noticed that many US states have yet to get on top of the first wave even as lockdowns are eased. There’s still plenty for volatility to feed on.
At a time when governments and their central banks are providing huge amounts of monetary stimulus, it easy to question central banks independence but more importantly what value they place on their currency. As monetary stimulus is placed ahead of currency stability, there is good reason to expect every currency to be weak, the US dollar – the currency with the greatest amount of stimulus – being at the top of the list.
Of course, not all currencies can be weak at the same time – it’s a zero-sum game. However, economic historians will remind you that excessive amounts of money in the financial system can lead to inflation. It hasn’t since the last crisis in 2008/9 but there’s more money in circulation now as the following chart courtesy of NS Partners illustrates.
So called safe assets don’t compensate investors for currency risk/depreciation as they have gone from being reasonable return with low-risk to reasonable risk with almost no return. Both Growth and Dynamic Funds hold gold (via a physically-backed gold ETF) as part of their cash allocation as an alternative currency. Younger investors might prefer the swings and roundabouts of bitcoin but that isn’t and will not be for us. You could argue that gold is the bitcoin that’s been around for centuries, so we’ll stick with gold as the alternative currency of choice. Which would you prefer to receive as payment if you had to choose?
After the portfolio turnover of April and early May to increase focus on the digital economy winners, portfolio activity has been more subdued and back to historical levels of minimal changes on a month by month basis. We are not traders, that can be a quick way to lose money, but we will seize an opportunity for long-term benefit as happened at the end of March. Those changes have borne fruit in performance terms, but we will not be rotating into so-called cyclical ‘value’. The only change to portfolios of any significance has been to allocate just under half of Growth’s cash to gold as an alternative currency as mentioned above. The multi-asset Dynamic is already a holder of gold. In Dynamic, cash from inflows was used to top up the cloud computing ETF.
Thank you and we hope you are safe and well.