We continue to see a lot of uncertainty around the world. Last Tuesday Russia announced that they have a vaccination to treat coronavirus. However, many countries scrutinize the effectiveness and safety of the vaccination. The main criticism is the fact that the testing period started less than two months ago. We expect that it will take at least until the beginning of next year until a reliable vaccine is available for worldwide distribution. Consequently, international travel restrictions will continue to be in place for a while. Furthermore, we expect that during the months ahead, the volatility of the stock markets will stay high. Depending on the outcome of the Presidential election, this volatility could stay for quite some time into 2021.
Investors have a strong focus on economic recovery in the aftermath of the lockdowns. While the financial markets make us believe that we are back to normalcy, it is important not to glorify the observed recovery. Companies are still struggling with the consequences of the coronavirus. The fiscal and monetary measures did indeed help a lot in overcoming the toughest part of the pandemic. But, it will not make up for the losses that already occurred and it is not a sustainable way of growth. As mentioned in our last newsletter, the main drivers of the current bull market are FOMO ( “Fear Of Missing Out“) and TINA (“There Is No Alternative”). Especially the latest boost was not based on economic numbers and gives reason to be more cautious again. Additionally, we see a rising risk for a correction because many investors now see their performance turn into positive territory recently. Since the skepticism about the current recovery rises, they might be willing to reduce their risk by realizing some of their gains.
WHVP Podcast Our second podcast guest is Scott Maurer from Advanta IRA. Scott is an IRA expert and educates the public on the intricacies of self-directed IRAs. In this episode we talk about what self-directed IRAs are, how you can use them to your advantage and how the whole process works. You can have a listen here: Link to Podcast.
As mentioned before, important indices are almost back to where they were at the beginning of the year. However, do not walk into the trap of believing that this is a sign of real recovery. As mentioned in our last newsletter, the recovery is, amongst other factors, based on the stellar performance of a handful of tech companies. The fact that a few strong companies drive the recovery is not a phenomenon that we can only observe in the U.S. but also in other markets. Considering the recovery so far the question remains where you can still find investment opportunities with a manageable risk and further upwards potential.
In our perspective, the insurance industry shows some attractiveness. There are still companies in that sector with share prices down 20% to 30% year-to-date. The reason for the negative performance so far are liabilities out of the coronavirus. However, due to the lockdowns as well as the change to home-office many risks have not materialized this year. This will, at least to a certain amount, compensate for the losses caused by the coronavirus.
With rising coronavirus cases in the US, widespread street protests, and a presidential election, we expect the Eurozone to outperform the US in the next year. The chart below shows this quite beautifully. According to the graph below the Eurozone GDP is expected to outpace US GDP by 1.60 percentage points in 2021. In times like these, it is especially sensitive to internationally diversify your wealth. Through international diversification, you can profit from these developments, reduce your overall volatility and invest in investments that are less-closely correlated to the US market.
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On the currency-side, there has been a lot going on this year. The U.S. dollar index (DXY) is of special interest to us. The DXY represents the value of the U.S. dollar against a basket of six currencies (Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona and the Swiss franc). After the DXY showed some strength for the U.S. dollar in the beginning of the year, there was a weakness at the beginning of March followed by another strengthening of the U.S. dollar. Reaching this years’ high on March 19 we can observe a continued weakening of the U.S. dollar since. The enormous stimulus packages are the main driver for this. Currently, the DXY is as low as it last was in June 2018. There are no signs that the U.S. dollar will sustainably strengthen again any time soon.
A weakening U.S. dollar opens opportunities in the field of fixed income. The European Central Bank and the Swiss National Bank still charge negative interest rates on large cash positions. But an investment in a bond that pays a small interest may be useful when focusing on the potential currency gain.
The situation is different when it comes to emerging markets. After we observed the above-described development of the U.S. dollar, we have seen that the U.S. dollar keeps up some strength against emerging market currencies. We currently do not believe that there will be a lot of movement soon. The reason for that is that the raging pandemic hits economic activity, increases poverty, and exposes weak policymaking. Thus, investors refuse to take the risk to move investments into emerging markets.
As one of the most exciting happenings this year, we have seen the gold price going up to an all-time high at USD 2.072,90 per ounce. The silver price did catch up and outperformed the gold rally by far. However, the breakthrough in such a short period was reason enough to expect a correction. The news of Russia’s vaccine was another driver of the correction. Even though the correction was quite painful, it was a valuable reminder of how fast the situation can turn. Having said that, we are happy that it happened sooner rather than later. Through the sell-off, we came back to a more reasonable level in our perspective. However, we do expect the gold price to stabilize above the current level of USD 1.950,00 per ounce.
On the commodity side, the price for crude oil WTI was able to stay above the USD 40 per barrel. This is indeed still quite far below the price that would make some of the oil business profitable again. On the other side, the stability of the price above USD 40 per barrel gives some security for planning to companies that either produce oil or rely on oil for their business. Further commodities like copper, iron ore and nickel were able to recover since March too. With an ongoing reopening of the global economy, we will see increasing demand. This will be a chance for commodity prices to rise further. However, in the mid- to long-term we expect production to rise again. This will bring back the price to pre-crisis levels.
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