COVID-19 was a shock and brought the world to a halt. Newspapers are still focused on the 8.1 million people infected by the virus. However, there are also about 4.5 million people that have recovered. Thinking about the remaining 3.1 million who still are infected, data shows that the symptoms are mild in over 90% of the cases.
People are now wondering if there will be a second wave and if so, what the governments are going to do to fight it. Contrary to the above numbers, the world health organization just announced that they believe that the worst is yet to come. If one thing is clear, then that the future is extremely uncertain. We do not feel that a second lockdown is likely, especially in democratic western countries. Too many people are fed up and see themselves as victims of the measurements against the virus. In most countries, people will not be willing to obey orders that continue to limit their freedom so significantly. The current data, especially in China and Europe, show a slight indication of a second wave. Should the numbers raise within the coming weeks, the governments will take measures in one way or another. The fear of an outcome similar to the Spanish flu is too big to ignore. As of today, all of these predictions require a lot of speculation. The only scenario, which would give us confidence to get back to normalcy soon, would be a vaccine, which can be produced in a short period. As of today, this does not seem very likely. The economic consequences of the virus can be seen looking at the current unemployment numbers in different countries. Especially the numbers published by the US have a significant influence on the stock markets. After having seen unemployment at 14.7% in April the numbers decreased to 13.3% in May. We believe that the numbers will go down further as the economy wakes up, but we still expect them to stay significantly higher in the mid-term compared to what they were before. According to Forbes, there are already about 100 companies with at least 500 employees each that must file for bankruptcy due to COVID-19, not to mention all the smaller companies.
WHVP Podcast We are pleased to let you know that we recently launched a podcast. Our first guest is Pavla Melkova from Taxpat. Pavla is a US tax expert specialized in foreign bank account reporting. In this episode we talk about about what excites Pavla about the tax business, what COVID-19 has changed from a tax perspective and what to consider when investing in an offshore bank account You can have a listen here:Link to Podcast.
Despite the spread of the virus, the riots against racial injustice, the emerging trade tensions between China and the USA, as well as the upcoming recession, we see important indexes climbing to levels seen before the outbreak and even above. The main reason for that recovery is not based on the economy, but rather on a few factors that in our opinion do not speak for a sustainable recovery. First, there are a handful of strong tech companies that pull up the indexes disproportionate (see graph below).
Second, with the incredibly low yields on bonds and negative interest rates for many currencies, there is a lot of “there is no alternative” sentiment. Third, central banks are pumping substantial money into the market. This leads to markets, which do not work properly and hurts the market equilibrium. Based on this, we have acted extra carefully during the last couple of months. After executing some stop losses, we decided to take in a new position where we felt that it would make a good long-term investment based on the current valuation. Our focus was on different megatrends. In this specific case, we found a company that is strong in the battery production, which we feel is essential for the future of mobility. We believe that the battery industry will therefore gain weight in the future. We additionally took a position in a company where we identified a fair chance to profit from short-term volatility. In this particular case, we found our investment in the travel industry that suffered quite a lot recently. However, at the current levels most bad news seem to be priced in. Travel related stocks show a volatility that has quite some up- and downside potential. Having a closer look at this industry, you will find companies that handle the situation better than others do. Since travel is quite a cyclical industry, some companies are able to adapt their business quite fast and lower their costs significantly in a short period. This gives us reason to believe that there are opportunities available. The decision for a more volatile investment brings us to our stop loss strategy, which we introduced two years ago. In those days, share prices were at higher levels and the volatility was quite low by comparison to today’s situation. The current prices combined with the high volatility leaves us in a situation where we feel that it is not always smart to work with stop losses in the way we used to. Therefore, when we are looking into a company, we are trying to get an understanding of how the company will handle the current crisis as well as how the company will perform when we are returning to normal. Having said that, before we decide to overweight the equity market again, we are waiting for the reporting period that will show us definitive numbers of the second quarter. We do have a short list with investments that we are tracking and waiting for reassurance through the reports before taking any actions. In fact, bad numbers for the second quarter are expected; however, it is not clear yet how bad they will be.
Webinar Recording on YouTube We just hosted our first webinar talking about working with an independent asset manager, the set-up, advantages and challenges of an offshore bank account and much more. Make sure to check it out here: Link to Webinar Recording.
There is not a lot to say about bonds. In our view, the bond markets are widely dead when it comes to conservative long-term investments. Since the central banks decided to buy whatever crosses their way, there is a run into bonds with the hope that central banks will buy them at a higher price in the near future. That game might be interesting to play, but it does not fit into our conservative strategy. Therefore, we became very selective when it comes to bonds. Much more interesting to us is the development of different currencies. The current situation is showing quite strongly, which currencies might be worth an investment and which are more speculative. While the emerging market currencies in general show an interesting evaluation against the USD, some are riskier than others are. We feel that Mexico for example is quite a stable country compared to other emerging markets and that therefore the Mexican peso has some potential to gain back strength against the USD. The same is true for the Russian ruble that has traded around USD/RUB 60 to 65 and is now trading around 70. A strong driver for these currencies is amongst others the oil price that we will discuss in more detail below. One of the currencies that proved its value quite well over the past months is the Swiss franc. The main driver for the Swiss franc is the underlying economy. One of the specifics that we would like to point out is the government debt. The differences are stunning. While Switzerland has government debt of around 40% of its GDP, other countries like the USA show government debts well above 100% of its GDP. These numbers represent the status before COVID-19 and with recent measurements and a shrinking GDP in 2020; the gap will most likely be even larger. The International Monetary Fund stated in its latest World Economic Outlook that they are expecting global public debt to reach an all-time high, exceeding 101 percent of GDP in 2020–21 — a surge of 19 percentage points from a year ago.
Gold seems to finally be able to stay above the USD 1,750 per ounce level. How sustainable this development will be, will be shown within the next weeks and months. We remain bullish on gold and expect the price to rise above USD 1,800 in the current environment. Within the next 12 months, we could even see prices rising above USD 1,850. Our main underlying reason for that assessment is the expected worldwide recession. Enhancing this development is also our expectation of a lower US dollar. Silver on the other hand is still considerably cheap compared to gold. However, having a look at the chart for the years 2008 to 2012, we see that silver needed some time to outplay gold as an investment. We therefore are not concerned about the current development.
After a historic low in the oil price, we experienced a recovery to the price level of about USD 40 per barrel crude oil WTI. A second slump in the oil price, as many expected, was not taking place. We expect the oil price to keep its level around this price for now. However, in the long term that is not a solution since there are quite a few oil producers that would not be able to survive. Many of them had to shut down in April and May. They will not be able to restart the production if the oil price does not raise above USD 60 per barrel sustainably. Furthermore, not every oil producer could rest but few had to file for bankruptcy. This might cause a rising oil price due to a lower production in the mid-term.
Some additional Reading
We are an independent Asset Manager, registered with the SEC in the U.S. and are located in Zurich. We are associated with several first-class private banks in Switzerland, Liechtenstein and Austria, which act as custodian banks for our client’s accounts. Learn More here.