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John Townsends Investment Opinions

John Townsend's Investment Opinions 25 March 2020 Update

Coronavirus or Covid-19: It's not (yet) over.

The wave of the coronavirus pandemic has left China and is now over Europe and heading for the US.

There are many influences for investors to be aware of. Firstly the panic selling of anything that could be sold and this at virtually any price. Then there is the current oil price war between Saudi Arabia leading the OPEC countries and Russia. Finally we have the virus itself which is causing fear and consternation among the public and governments in every country in its path.

At long last, the developed worlds' central banks and governments have reached agreement on the fiscal support mechanisms necessary to keep the world afloat and alive, if not actually vibrant. The last government to sign up to a package of sensible support measures was the United States. Even when the need for action was clear, there was an attempt to support politically friendly large companies and underplay the support for the poorer communities. This took a day or so to clear, but now the coast is clear for a major support package from Washington.

Many investors were forced to sell their holdings including gold, at the lowest prices because they had to meet their obligations. Many ETFs and automated trading systems, especially those with leveraged strategies have major losses which will still be announced. The extreme movements have also shown which fund managers have performed well in adverse circumstances and which stuttered and perhaps failed. This term is called 'downside capture' and recognizes the relative performance of a manager in falling markets. I will be adjusting my clients' portfolios to reflect the lessons learned from this crisis.

The investment markets, especially the stock exchanges began their rebound in the expectation of such coordinated action, but the recovery is still weak and could be fragile. There is however still no roadmap except perhaps for the very long term. It is clear however that many institutional investors and funds must rebalance their portfolios at the end of the month and quarter and will be buying the equities of many different sectors.

The equity markets in Germany suffered surprisingly badly in the past month (yes, it was really just a month), this despite the fact that Germany has so many excellent engineering and electronics companies. Partly this reflects the fact that the DAX 30 index only has 30 major companies in it. Partly also that short-term traders could not escape their trades in Equities and Indices quickly enough. When an on-line trading platform collapsed under the deluge of sell orders, many short-term investors had to accept major losses.

The future recovery will not show a friendly straight line. The first day of positive results on Tuesday 24th March reflected pent-up frustration that the investment markets had fallen too far. There will be setbacks on the journey to recovery and it is clear that there will be a short global recession based on the closing of many businesses during the battle against the virus.

It is interesting to note that the central bank measure have all but abolished interest rates potentially for a longer time. This will prove to be an aid for weaker economies and companies, but there will still be a number of bankruptcies as customers stay away and there are no reserves to cushion the blow.

The German economy will recover relatively quickly especially once their workforces return to productive work and their customers start buying again. Germany also had a disciplined budget which allowed swift financial support for the stuttering economy.

Italy by contrast has no reserves and no disciplined fiscal policies and has called for a major support package from the European community.

The United States of America built up no fiscal discipline and spent and borrowed very heavily during the rich years. The present fiscal measures going through congress and the senate will heavily increase the level of governmental debt. While this is the wrong time to explore fiscal conservatism, it will fall to the US treasury and the government as a whole to rein back excess spending when the crisis is past.

Economic recovery will depend upon heavy investment which will undoubtedly be rewarded when more stable markets have returned.

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 25 February 2020

Coronavirus or Covid-19: don't Panic!

A seemingly new virus has emerged in the Chinese city of Wuhan in Hubei province and has then spread to parts of the rest of China and, via the travelling public, to elsewhere in South East Asia and in a small part, on to the rest of the world. The World Health Organisation has expressed concern over the spread of the virus to Iran, Italy and most recently France, Germany and Tenerife.

The social networks abound with rumours and 'Fake News' panic reports and have therefore by extension caused the '16 year old' traders in the financial markets to immediately press every alarm button they can find and have instigated panic sales of equities. The WHO suggests that not only is the world facing an epidemic but also an alarming 'infodemic'.

The reality is that some suppliers of components in China have temporarily shut down to prevent the virus from affecting their staff, and therefore some global manufactures, especially those which have 'just in time' policies and carry no or few component stocks have been affected by missing parts. These manufacturers can be in the automotive sector or electronics. Indeed any area where parts or goods can be made more cheaply in China than elsewhere is affected. The Chinese government has also shut down factories that produce medicines and similar products such as analgesics, which were made cheaply there. The shortage of these products will be felt around much of the rest of the world. Airlines and tourist resorts have also suffered as people as a whole try not to venture to areas which might be affected.

The fall in equity market prices especially in the Hong Kong market, which is one tenth of the size of the Shanghai / Shenzhen markets is a temporary phenomenon and as with similar crises such as SARS in the past, will soon be over. For those investors who like to take less conservative risks, this is probably a good time to invest anew in Asian - including Chinese – equities.

For those with a more sober approach to life, a longer term view of their investments and a memory of past crises, what we are seeing now is another typical overreaction in the equity trading markets, which will be multiplied by the effects that falling indices will have on the ETF investments. Good active managers will have diversified their portfolios so as not to be vulnerable to shocks in any small groups of sectors. Some, especially those specialized in the Hong Kong equity markets will see greater movement, but even this will be short-lived

The main message is to hold one's nerve and not to sell into a temporary fall. My clients with balanced portfolios will still have a growth in their portfolios of around 2% since the beginning of 2020, even after the panic fall in the markets. This is less than before the crisis emerged but the year is still less than 2 months old and there will be plenty of time to make additional gains when the panic eases.

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 Townsends Investment Opinions January 2020

"There is only one good, knowledge and one evil, ignorance" - Socrates

A very Happy New Year and a Happy New Decade to all.

There have been many changes in the past decade. Everyone has their own list of events, some good, and some bad. The one certainty is that the next 10 years will have many more changes and there is no certainty as to what these changes will be.

The investment markets are influenced on their returns by the acts of politicians. Some acts are obvious, such as those in the US at present, some are less clear, as in Germany, but will probably have a long lasting effect.

Cleon was an Athenian General who died in 422 BC. In his lifetime he earned a reputation amongst his peers for being a loudmouthed, unscrupulous and war-mongering demagogue. He accused his peers, especially Pericles of maladministration of public money, though the latter was able to clear his name. Cleon went on to dominate Athenian Politics, misusing the democracy that was applied there. He was rough and unpolished, but he knew how to raise the emotions of the poor Athenians who in turn supported him in making false charges against his political opponents so as to remove them from power. He criticised the Athenian generals, but was himself a failure when it finally came to leading an Athenian army. The actions of Cleon led inevitably to the downfall of the Athenian Golden Age.

Although an aristocrat, he found it politic to break off all connections with his own noble background. His influence lay in a forceful and bullying style of politics and a tone which was both anti-intellectual and anti-aristocratic. In his treatise 'History of the Peloponnesian war' Thucydides described Cleon as being an opponent of peace because if tranquillity were ever to be restored, his crimes would be more open to detection and his slanders less credited. Lessons can be learnt from history even from 2,500 year ago.

Careful investing means having to look beyond the immediate and past movements in the markets. Whereas major US corporations and their shares have contributed to much of the profits in the past years, some could now be running out of steam. Many companies in the US and in Europe have borrowed heavily while interest rates were (and are) low, in part to buy back their own shares, which in turn has helped to raise equity prices. This increased debt has also been used to cover inefficiencies. The problem is that much of this additional debt will come back to haunt the lenders when interest rates begin to rise again as one day they will and when companies fail as a result. A major change in the past decade has been that it is no longer the banks that lend to companies and foreign governments, it is the investment funds. When the crunch comes, the banks will have earned their fees as arrangers, but the funds will have carried the risk and will bear the brunt of any down turn. It is time to limit investment in fixed income products severely.

Investors have to be able to understand the risks their funds are taking. ETFs are the archetypal 'fake' investments. An ETF does not carry out an analysis, but instead follows a market blindly; when an index changes its composition, so will an ETF. The difference between the selling price of the old asset and the purchasing price of the new one is then disguised in the undisclosed costs. In a strong and rising market, a lack of decision making analysis does not show. When an economy weakens, critical analysis becomes essential to understand the risks and avoid or at least mitigate them. An ETF invests using borrowed money attracted by the seeming lack of costs. Analysis and risk management costs money. Analysts mitigate losses; without such knowledge there is no understanding and therefore no protection against sudden market movements.

Investment sectors in the coming decade must include equity funds which earn dividends from the companies in which they invest. These companies have to pay dividends from earnings and not from increasing their debt. Only careful analysis will identify these.

There is an increasing market for sustainable investments. This market will continue to grow rapidly and the prices of shares from companies whose activities are clearly sustainable have risen and will continue to rise based on the demand for such assets. The bandwagon effect has of course taken hold and many fund management companies have labelled their funds as being sustainable, even when their assets are not. This is called 'greenwashing'. There are inevitably many agencies which offer sustainability ratings. Some of these are credible, others, again, are not. The United Nations has issued a list of 17 Sustainable development goals which investors should adhere to when selecting their investments. Many of these goals are contradictory and professional fund managers have had to sub-divide these criteria into five broader groups to make conscientious investing possible.

Economic markets too have their problems. Investors have benefited greatly from the rise in demand for US and European equities, but the US economy seems to have reached a plateau which Europe has yet to arrive at. The warning signs are there and caution is called for. Third-world investments especially in Asia, including China, presently show a great deal of promise.

Japanese companies have quietly become profitable again. Japanese institutions are investing domestically and abroad and the stock markets, which have been at a low level for too long a time, have begun to rise, especially as alternatives to the US markets are being sought. The usual divisions between value and growth stocks are not particularly relevant here. Good companies are being supported by rising demand. Fund investors should concentrate on finding competent and experienced fund managers to access this market.

Chinese companies have been vilified because of the involvement of the Chinese state in many aspects of their activities. In truth, those companies which are big enough to warrant overseas investment do probably have governmental oversight, but many are inherently dynamic and profitable. There is an argument that larger companies even with state oversight, still have a spirit of entrepreneurship, yet are unlikely to suffer the economic volatility in times of adversity, particularly because of government support. The banks are another matter however. The Chinese government, having clamped down on excess lending from secondary banks, especially for investments outside China, is now encouraging local banks to support small and medium companies which could be suffering from concerns over the trade dispute with the USA.

There is presently an attempt at cooling the so-called trade war started by President Trump when playing to his red-neck US crowd. He might have had more success had he reined together the other global economic players, but teamwork has seemingly never been his strength. In the end, it is US farmers and industry that have suffered more than any Chinese sector. Many US companies are now terrified that the markets for their products (the biggest market for Apples iPhones is in China) will dry up. There will be a treaty of sorts and Mr Trump will claim the usual resounding victory in this, an election year. In reality the US has missed its target and has gained only scorn and increasing distrust from China as well as from traditional US allies and much of the rest of the industrialised world.

The investment markets will not continue their steep upward path in 2020 and beyond. There will be increasing volatility and investment portfolios will need to be adjusted to meet these challenges. This means that the proportion of equities in even the most dynamic portfolios will need to be reduced. Above all, portfolios will need to be diversified within investment sectors and between them. There can be no alternative to broad diversification. The hype over low cost ETFs should be ignored in favour of safer returns from the best performing managers with real analysis, high returns over their indices (Alpha) and a proven track record.

Past performance is no guarantee of 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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