The current focus is the coronavirus. This virus makes people think back to 2003 when SARS struck China and had a notable impact on the world’s economy. Making things worse since then, China is more inter-twined in the current global value chain and has grown from the world’s sixth-largest economy to the second biggest today.
Nevertheless, apart from the coronavirus, there has been more that has moved the markets so far this year. It all started with the near escalation of the conflict between Iran and the US. Since it was only a short skirmish, markets quickly shrug off the threat of war and were able to move forward and hit new highs again. At the end of January Great Britain finally left the European Union, and last, but not least, President Trump survived an impeachment process, which abruptly came to an end on February 6 and strengthened his position even further.
The US economy beat expectation so far this year by adding 225,000 jobs in January. Meanwhile, the unemployment rate moved slightly up to 3.6%. Nevertheless, despite good news concerns are on the cusp of rising. So, by reviewing all the events of the past six weeks, we are observing a move to higher volatility in the markets. As such, we believe that volatility will not decline until the US-elections are over.
Due to the current environment’s volatility, it is important to have a clear strategy to weather the storm. We, as a prudent asset manager, focus on companies that have stable balance sheets, pay good and sustainable dividends, and have a convincing record of dealing with prior times of crisis. However, we also feel that it can make sense to utilize the current volatility situation in place. Therefore, we have added volatile investments with the aim to achieve short-term gains. In this process, we scan the markets on the look-out for investments that are oversold. Upon coming across such potential investments, we carefully asses the risks and rewards. As nobody can predict the future, we also use stop losses to mitigate lows. We strongly feel that we will be able to take advantage of opportunities by adopting this strategy.
Why Finding A Favorable Banking Option Will Be Crucial For The Volatility Ahead
Bonds are out: it is near impossible to find good rated bonds in stable currencies that offer a decent return. The only way to make money on bonds is to invest in them at current prices and hope that someone will be willing to buy them at higher prices. From this perspective bonds have the character of equity investments surrendering their original intention of being the safest part of portfolios.
Nonetheless, there are still certain bonds, which in our perspective are worth investing in. These bonds are denominated in emerging market currencies with the opportunity to benefit from rising exchange rates. We are willing to invest in Mexican peso or Turkish lira denominated bonds if the issuer has an investment grade rating and is located in a developed country. The yield to maturity must be high enough that the currency could lose up to 10% and still make a good investment. Additionally, the bond must not have a maturity higher than three years.
Regarding the currencies in general: since the beginning of 2020, we have seen the US$ coming in stronger after a weakening period in the last quarter of 2019. After all, the US$ still represents the worlds reserve currency which comes in greater demand when insecurity rises. This was the case especially due to the fear following the coronavirus outbreak. The US debt is currently around US$ 23 trillion and rising, even though during times of strong economic growth debt should be reduced and not increased. We would therefore not be surprised to see pressure on the US Dollar in the near future.
We believe there are only a small handful of currencies that make sense in portfolios: safe haven currencies such as the Swiss franc as well as the Japanese yen. There also appears to be some upward potential for euro and sterling since Britain officially left the European Union at the end of January. As time progresses, we sense that there will be more security when Britain negotiates and secures future trading agreements.
While gold was able to pursue its upward trend in 2020, silver is still trading at the same level as at the beginning of the year. We believe that 2020 will be another good year for gold and also believe that silver has the potential to catch up. We see a silver to gold ratio of around 90, which is very high, although reports have been circulating suggesting that the ratio will drop in the not too distant future. However, since we are long-term oriented investors, we do not worry about the silver price and believe that investors will recognize its value when equity and bond markets become more and more expensive.
In commodity markets, we especially see crude oil prices distinctively lower than at the beginning of the year. The significant drop is due to weaker Chinese demand – China is the largest crude oil importer – caused by the coronavirus outbreak. However, since we believe that the coronavirus will be eventually contained, we feel that even with a weak first quarter the Chinese economy will recover leading to an increased consumption of oil. China is an important supplier of parts and components to many companies and the recovery of production capacity will lead to the first quarter shortfalls being compensated.
All in all other commodities, too, are feeling the strain of the coronavirus outbreak, but will recover as China gets the disease under control.
Some additional Reading
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