First of all, we wish you and your loved ones a very Happy New Year and would like to take the opportunity to express our gratitude for having such a loyal readership! If you feel that your family and friends could profit from our Swiss perspective as well, please feel free to share our newsletter. Also, if you feel that there are certain areas we should work on to provide even more value to you, please let us know! What you will find in this issue:
A review of the investment year 2020
Market overview: Diversification, now more than ever
Equities: The most important thing is taking part
Fixed income: USD 18 trillion worth of bonds with negative yields
Commodities: Quo vadis?
Imagine you had an accident in January 2020 that put you in a coma for 12 months. After you wake up you can remember where the important indices were before your accident and then you receive the numbers on where they are right now. I bet you would not guess that there was, or rather still is, a pandemic that led to not only one but two and in some cases even three shutdowns of whole countries’ economies. Let me give you a short summary of the high- and lowlights of the investment year 2020 from our perspective. Starting with the ongoing euphoria from 2019 the indices rose until mid-February. Then everything crumbled fast. Indices experienced a crash of about 30% within less than a month. During this time the New York Stock Exchange halted trading several times. Then the Federal Reserve announced extensive new measures to support the economy, which led to a quick turnaround. However, that alone was not enough. The enormous fiscal stimulus packages gave an additional layer of assurance to investors to get back into equities with the confidence that whatever happens, the government will pay for it. As the markets have already recovered quite a bit up until May, the unimaginable happened when the forward price for a barrel of oil (WTI) fell to negative USD 37. During the summer, the decreasing corona cases gave further relief and optimism to investors. However, this development was not sustainable. From September onwards, corona cases started to rise again, which ended in new lockdowns and measurements that brought another hit in the recovery. As it started to show that the stimulus packages from national banks and the governments would not be sufficient to cover all the damage caused by the new lockdowns, governments around the world decided to go for another round of stimulus packages and cash. In November, we witnessed the US presidential election where we saw an unprecedented voter turnout. Due to mail in ballots and tight outcomes in some states, uncertainty about the legitimacy of the election aroused. Last but not least there are already different vaccines available that were developed, tested, permitted, distributed and administered within less than 8 months. The distribution of the vaccines has been rolled out and it is expected that in developed countries the majority of the population will have received the vaccine by summer.
We have been busy in the last months of 2020 and have recorded three new podcast episodes for you. We covered asset protection and estate planning as well as real estate in Panama and banking in Liechtenstein.
Market Overview
That is it? – There are many people asking themselves exactly this question, when examining the recovery at the stock markets since March 2020. There are the most adventurous explanations that describe what this recovery is based on and whether it will continue or not. Who is right and who is wrong… time will tell. However, at the end of the day, everyone must analyze the situation for him or herself and decide for a strategy. We at WHVP have enjoyed participating the ride up after the crash in March which is in our perspective a consequence of the money flooded markets by the national banks coupled with the huge stimulus packages by the governments. However, we do not believe that the real economy is over the hump. On the contrary, we still believe that many of the consequences like bankruptcies and unemployment will become visible with a delay. It seems that the stimulus packages are like drugs that make everyone forget what is really going on. Yet, one day or another it will come to an end. Since no one knows when this will be it is quite challenging to find the right strategy going forward. We have reason to believe that the national banks and governments will and can keep up this strategy for the foreseeable future. Therefore, it is important to have a well-adjusted diversification of the portfolio consisting of stocks, precious metals, cash, and a small portion of fixed income. Consequently, we would not feel comfortable to drop the stocks we currently hold but are cautious when making new investments. We believe that it makes sense to realize some gains from time to time by reducing a position that did well instead of liquidating the whole position. With the potential of entering a new era of inflation rather than deflation, we feel that value investing might become more attractive again. However, as long as the interest rates stay as low as they currently are (according to the Fed they will not raise interest rates before 2023) growth stocks will have further potential too.
Equities
These days, equities are moved by hope, fear and oftentimes pure speculation. Investors driven by the latter one, are often members of the generation Y and Z who often do not thoroughly evaluate the company in which they invest but mostly look at the share price. During the last quarter of the year, we have seen IPOs where the stocks closed their first trading day 100% above the issue price. Moreover, the most fascinating part of it is that those companies mostly are not even profitable (yet). Another example of the craziness at the markets is the movement of the Hertz Global Holding. They filed for chapter 11 bankruptcy on May 22, which brought the price for a share down to USD 0.55. However, a couple days later the share price was back to over USD 5.50, which is a performance of about 1000% with no comprehensible reason. This behavior shows some parallels with the Dotcom bubble back in 2000. The mentality at the markets is positive and so are the developments of the stock prices. However, as history has taught us that can change quickly. Let us have a short review on our suggested industries we mentioned in our last publication. While the insurance industry did indeed recover further from their losses, the mining industry has lost further ground. Having a look at the insurance industry, we still believe that there is further potential to perform since many costs are indirectly covered by the governments and will continue to be. The negative development of the mining industry in our eyes is not justified and we do still believe in this industry after all. The reason for our pigheadedness are various but most importantly the following: Companies that are active in the precious metals industry have had tough years from 2011 to 2016. However, they learned to control their costs and are now in a position that gives them the financial freedom to either start paying dividends, increase their dividends, or start stock repurchase programs. Furthermore, in the current situation with low interest rates and a huge amount of government debt (see graphic below) the opportunity costs of holding gold will stay low and the insecurity of the monetary system bears insecurities.
This, in our perspective, is reason enough to believe that the gold price, in the long term, will at least stay somewhere around USD 1,900 per ounce if not event rise again. However, when investing into the mining industry always keep in mind the volatility that comes with it. On a side note, the graphic above shows once more how wisely the Swiss government handles its finances.
Fixed Income and Currencies
In the meantime, the world’s stockpile of negative yielding debt has increased to a record of over USD 18 trillion (see graph below). To make it comparable, the International Capital Market Association (ICMA) estimates the global bond market to be approximately USD 128 trillion. Currently, we do not believe that this trend will stop anytime soon. We already see an increased interest in bonds of emerging markets that pushes the risk compensation lower and lower. We even believe that the time will come when emerging markets bonds fall into negative yield terrain too.
The weakening of the USD further boosts this movement. The Dollar index (which measures the value of the US dollar against the currencies of its six most important trading partners) has lost about 7% in 2020 but is still considered as overvalued according to analysts. However, due to the impressive losses recently, we see reason to believe that there might be a countermovement in the near future. In the long term however, we do agree with the analysts. This development offers numerous opportunities for US-investors. You can benefit from moving part of your wealth into other currencies that show favorable conditions to gain value against the USD. Having said that, having part of your wealth in other currencies should be something that you consider as an investment, i.e. before choosing a currency make sure, you have an understanding of the country that issues the currency. The exchange rate of a currency to its partner currency (for example Swiss franc to US-dollar) is among others driven by a combination of the countries attractiveness for investors, the goals of the government and the national banks targets.
Free Webinar We are pleased to let you know that one of our Managing Partners will speak at Bosco Online’s Workshop “Key strategies of Investments and Wealth Management” on True Investment Diversification.
Date: 14 January 2021 Time: 15.00-18.00 (GMT+2)
Register for Free
Precious Metals and Commodities
The good news first. During the last quarter of 2020, the gold and silver price could defend their support levels despite further good news and stay at the same level as they did in mid-November. The bad news, they were not able to break out towards levels seen back in August. This leaves us in the same spot as we have been six weeks ago. There are news we expect that can move the prices in both direction. However, in the long term, based on our expectations that interest rates stay low and the US-dollar will weaken, we expect that the investment case for precious metals remains. Last time we mentioned platinum as a metal that in our eyes becomes more interesting again. Especially the global green transition makes us believe that platinum will play an important part of it. While delivery capacity issues are not seen as a problem yet that can change in the future. This might bring the price back to levels seen in 2011 or even 2008. However, with the price of platinum around USD 1,050 per ounce we find ourselves in a very interesting position. As mentioned last time for us this is the crucial era where it appears that platinum becomes an investment opportunity again. Since the governments cannot distribute free cash forever, they need other possibilities to jolly their folk along. We believe that it will be with infrastructure projects that will provide work to the people who are already unemployed or will lose their job due to the long term consequences of the pandemic and the measurements that were taken in respond. This in turn will consequently lead to higher demand for commodities. We have seen as many countries slip into a recession as never before. This in our eyes will lead to shortages in one or the other commodity.
Some additional Reading
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