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John Townsends Investment Opinions

John Townsend’s Investment Opinions April 2021

"All I can say is that on this earth there are pestilences and there are victims– and as far as possible one must refuse to be on the side of the pestilence." — Albert Camus, The Plague

A number of important factors have impacted on investors so far in 2020/21. These will have long lasting effects.

The COVID pandemic, featuring incompetent populist politicians with total policy paralysis thereby carelessly condemning many of their fellow countrymen to unnecessary suffering, is the pressure presently most in the news. In the USA, the era of incompetence, responsibility-shirking and name-calling has come to an end and the new president is proposing serious legislation to help the people and US infrastructure rather than a few party donors. An aggressive political and fiscal policy will help the country achieve a pole position in terms of economic growth.

The world goes on despite the pandemic. People fall ill and die of other ailments or accidents, economies thrive or falter and investors seek to make a return on their capital and continue to take risks they are unable to recognize.

In Britain, the appointment of a competent administrator to take charge of the vaccination program has produced remarkable results with a rapid vaccination programme providing lifesaving coverage. This has however, left unled and directionless politicians to continue their habit of stabbing each other in the back, breaking their word to their own countrymen and to foreigners and the private profiteering from contracts and connections in a depressingly undistinguished way. It is another sign of a malaise that will ultimately drive investment and employment out of the country.

European countries, which have produced world beating engineers, scientists and philosophers have become swamped in a bureaucratic quagmire resulting in a complete lack of syllogism and have therefore been unable to produce dynamic measures to fight the pandemic resulting in countless unnecessary deaths. Too many commentators are now trying to make half thought-out political capital by opining against the advice of scientists and doctors and demanding an immediate relaxation of lifesaving lockdown measures. If one looks hard enough there is always some so called expert or professor, normally from a lesser-known institution who can be quoted who will try to prove whatever opinion slant that one wants. Such idiocies are hard to avoid.

Let us be clear, there will be no freedom from the pandemic, at least in its current form, until everyone in the world, as well as in our own countries, has been vaccinated against it. Individuals should not have the freedom to opt out of a vaccination just because by the fact of others having it, they do not need to. Long term recovery and the reopening of shops, concert halls, sports events and markets depend on the rollout of vaccines now and if necessary, repeatedly in the future. Any complaints at a delay in reopening the economy should be placed at the doors of incompetent bureaucrats and the politicians who hide behind them, not at the municipal leaders who try to keep their people safe.

The initial financial recession in March 2020, which was a result of a reaction to the pandemic, was effectively met and was quickly over thanks to the concerted actions of international central banks who lowered interest rates and made financial liquidity available to companies and private consumers alike in order to limit a collapse in demand as well as industrial supply.

Central banks have accepted the fact that drenching their domestic markets in liquidity will cause inflation. The level to which inflation will rise cannot presently be measured. In general, 2% is held to be healthy in a normal environment, though the central banks are disingenuous in suggesting that that level should be seen as a long-term average. In the short term, expect inflation to rise to over 5% before beginning to fall back. The inevitable result of very low or negative interest rates will be the formation of financial bubbles. We are already seeing a jump in house prices with purchasers assuming that they can cope with large but low interest rate mortgage loans. The danger, if not the certainty, is that purchases made in this environment will lose value sharply when normal economies and interest rates resume.

While western economies were and are focusing on the pandemic and its effects, it is China, where the first mitigating steps were taken, that is emerging with a strong economy. The Chinese are refocusing on meeting internal demand for investment in consumer durables and consumer discretionary spending while also producing ever more goods for export to the rest of the world.

Economists are undecided as to whether Chinese domestic growth, which to a large extent comes from production growth and wage spending will be 6%, 8% or even 10% in 2021 and will remain at a similar level in 2022. All however agree on the fact that the Chinese economy is booming and that it is providing life and support for the economies in neighbouring countries too, much as the USA did several decades ago. We are truly entering a Chinese dominated Asian era.

In western popular culture this Chinese economic strength causes perceptual problems. China is now seen as a threat to its neighbours. The treatment of its own minorities causes unhappiness in the West. There is a view that China should behave the same way as western countries do now, all the while forgetting that Chinese actions today reflect the way the colonial powers, including the USA, treated their minorities only a few decades ago when western economic growth was taking place. We may not like it, but we cannot deny that we too undertook similar measure to build our economies in the past.

A new global economic cycle has begun. It is radically different to and potentially more fragile than any cycle we have experienced before. It was caused by the severity of the pandemic but is also vulnerable to a reemergence of the virus in a different and unexpected form to which we do not, at present have a solution.

The brakes to the international economic system come from different sources. First of all, there is a shortage of skilled labor where too many people have remained untrained or have been trained in the wrong skills. Producing and service companies cannot meet the new demands made of them. China also has a shortage of high-quality steel. Much is made of the export of Chinese steel at dumping prices, yet the reality is that China desperately needs the quality of steel they cannot at present produce enough of themselves and the country cannot use all the low-grade steel it does produce.

Raw materials too have their shortages. I have often argued that Copper is a bell-weather raw material showing how industrial production in almost every form is performing. Energy too, including the use of wood and bio methane to fuel power stations and homes is in sharp focus. One has also to be aware of the costs of transportation as seen in container shipping rates. The European Union’s Green Deal, which has just been announced, is aimed at reducing Carbon Dioxide production to zero by 2050. 73% of carbon dioxide production is related to the present production of energy, but there are political comprises at play here too. There is an emotional backlash, especially in Germany, to the production of electricity using nuclear facilities. This is still an environmentally efficient source of energy and its use will be accepted by some countries and rejected by others.

The European Union has also imposed a series of sustainability regulations for investment, especially under sections 6, 8 and 9 of the European Eco-Initiative. The political aim is to force the investment sector to become more ecologically aware. Once the fund companies themselves can be prevented from ‘greenwashing’ and mislabeling their funds, this will doubtless have more of an effect. At present it looks like a triumph of hope over reality.

There is no alternative to investing in Asian and US Equity markets, with some excellent European Assets thrown in for good measure. Still, it is absolutely essential to have a very broad distribution of assets in case a new version of the pandemic strikes home. There is little to be gained in having fixed income investments, other than to provide a source of stability to a portfolio; they yield very little without the investor having to take unnecessary risks. Funds investing in convertible bond issues can be a valuable source of distributing risk. Cryptocurrencies are a disaster looking for somewhere to happen and while presently fashionable, are best left to ambitious school and university students who have yet to learn what it means to face unnecessary and unexpected losses.

Past performance is no guarantee for future profitability

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.


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John Townsend's Investment Opinions December 2020

"I'm not upset that you lied to me, I'm upset that from now on I can't believe you." Friedrich Nietzsche

The changes coming with the new year 2021 are now apparent.

Firstly, the chaotic one-man government of the United States has been voted out and is to be replaced with a new, hopefully more effective and reliable leadership which can begin to repair the damage done to the image, overseas trust and economy, inflicted on the country since 2016. It seems that the Russian influence on the American president has realized its desired effect of bringing economic and political chaos and has left the western world in a much weaker and leaderless political situation than it was before 2016.

President Trump is not letting his clear defeat at the polls get in the way of his self-publicity or the truth. One is reminded (as someone raised in the United Kingdom) of seven-year-old boys playing cricket who, when bowled out or caught, throw their bats down and emit a wail of ‘it’s not fair’. In truth, it seems that the outgoing president, faced as he is with impressive personal debts, is raising as much money as he can from his supporters while the going is good. Ever the showman, he is whipping up the hysteria of his supporters in the face of a complete lack of evidence that any part of the Presidential election was amiss. To quote Adolf Hitler, “If you tell a big enough lie and tell it frequently enough, it will be believed.” Students of modern history may see parallels between the propaganda in Washington DC today and that spread in Germany in the 1930s and 40s.

Once the US president had declared the existing Transpacific Partnership (TPP) agreement, itself signed by the United States in February 2016 to be over, China pulled the remaining members of that agreement together and agreed a new pact called the Regional Comprehensive Economic Partnership or RCEP. The aims are much the same as before albeit with the danger that the Chinese Belt and Road Initiative (BRI) will be strengthened. There was no real logic in pulling out of the TPP, except to cause economic chaos. This is something that benefits really only the Russian government.

Russia is itself no economic powerhouse and cannot afford the competition that big spending by other countries produces. It can compete only by discombobulation and chaos. Quite how they were able to control the actions of the present US president who effectively dismembered the protections that might have prevented the Russian computer hacking of US governmental agencies may never be known, but the disfunction created by President Trump has severely damaged the economic interests of the United States and has weakened the links with the US traditional allies and trading partners. These can be rebuilt but it will take time and the relationship will never be as trusting and strong as it once was.

The position of the United States in the world setting will also not be the same again. The US dollar, in the past the main safe haven currency, has fallen in value against other major currencies such as the Euro and shows no sign of recovering. The much-vilified China has been strengthened economically, just at the time when the vision of its leadership was being questioned. China, far from having been weakened, is now expected to become the world’s largest economy by 2028, (where before Trump it had set itself the target of 2049). The Asian region as a whole is likely to benefit from this position, though there is an ever-present danger of overconfidence and corruption in the smaller states which could cause economic disruption.

India, China’s traditional competitor is forecasted to experience economic growth to the point where it will emerge as the world’s third largest economy by 2028. India is however less determinedly efficient than China and while it is an economic powerhouse there is still much that can go wrong politically which will hinder economic growth.

The Corona virus is taking its toll of the economies of countries across the globe. The fact that investors have not shown the concern that one might have expected, is due to the fact that looking at a two-or three-year time horizon, consumer and industrial demand is expected to have recovered and the present weakness will offer positive growth opportunities in the near future. A few vaccines have been approved and several more are in the pipeline.

How long they will provide protection is still unclear, but they bring with them the hope that the markets need. Emerging economies are likely to be the last to benefit from the vaccines and will probably therefore suffer longer.

The United Kingdom is now reaching the end of its departure from the European Community. This self-inflicted injury will bring economic weakness internally, with ructions from Northern Ireland, Scotland and Wales, whose interests have been sacrificed by the London-centric politicians who tell a good story about protecting the whole of the United Kingdom. The interests of the City of London, still one of the great financial centres of the world and a major source of external revenue for the country, have also been weakened, mainly because the present British government simply does not understand the significance of this market.

The European Community finds it difficult to speak with one voice and to travel in a unified direction, with countries such as Hungary and Poland determined to push their own internal political policies against the wishes of the remaining members. The big paymasters, Germany and France are unable to bring sufficient pressure on their recalcitrant colleagues in order to maintain European Unity and there is therefore a risk political paralysis. There are still some excellent companies in Europe, but the danger of economic weakness in the region gives cause for concern in the medium term.

Interest rates have been lowered to zero and below by international central banks which have been ensuring that there is more than adequate liquidity in the global economies. The US Federal reserve for instance, is buying some 20 Billion Dollars of assets A MONTH and shows no sign of slowing down. This is a balancing act, providing support while avoiding too much inflation. It is unlikely that interest rates will rise in the foreseeable future, there is simply too much liquidity. It also means that there is little to be earned from investing in government bonds, other than for use as a stabilizing position in a larger investment portfolio.

Where does this leave investors in 2021? The investment markets are likely to be calmer than they were in 2020, with more optimism and feelings of security. The optimism will bring with it a stronger economic growth, albeit with lower real yields in investments than were earned in the past.

Chinese competition with the United States in almost all sectors will encourage development in the global supply chains, bringing more efficiency in the delivery of physical goods and also financial services. Emerging countries are likely to benefit from being able to supply the growing demand for their goods. A new US government will not ease the pressure on China, even if the message is less strident and the actions more skillful than in the immediate past. The Chinese will equally not ease on the competition with the United States and will fight for dominance in supplying the emerging markets with high quality Chinese goods.

In the United States, there is already an increase in the number of ‘Zombie’ Companies, whose incomes have not exceeded their interest payments for at least the previous three years. The debt of these companies superficially offer higher yields to investors, but these companies will inevitably fail and like the junk bond markets of the 1980s, will take investors’ money with them. The United States is now a deeply divided nation, both economically and politically. The healing process will probably take years. The effect of the Corona virus and its mishandling by the US government is akin to a natural catastrophe with very severe damage that will leave deep scars and will also need a generation to recover from.

Let us be clear, there is absolutely no alternative to investing in Equities. The changes we have seen and will see in market conditions and opportunities can only benefit those companies which are capable of working efficiently. One has to look for quality in the equities and in the funds that invest in them. Merely following an index with ETFs is not enough. Banks, especially European banks have avoided the changes they should have undertaken years ago. They cannot earn from their traditional income sources and will be forced to merge of fail.

Past performance is no guarantee for future profitability

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.


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