What a year… We remember well where we found ourselves a year ago and yes, we have to admit that we did not expect markets to have taken off the way they did… It was an eventful year whereas most events had their beginnings in 2018 or earlier. There were the trade wars (yes two of them, one between the US and China and another between South Korea and Japan), the riots in France, and Brexit to name a few. However, no geopolitical hot spot has been able to slow down enthusiasm in the stock markets, bond markets, or precious metals markets. There is no asset class that did not end the year on a positive note. It is a quick and easy task to identify the reasons for what happened. To be fair it is way easier to explain what happened looking back than predicting future implications of events. We see one major reason in that central banks started to briefly normalize fiscal policies before crawling back due to fear of cutting off the economy’s upwind. However, we do not want to mix up our usual structure. Therefore, let us go through the different asset classes as we always do. Instead of repeating what we have already been talking about in the previous year, we will give you an overview of what we expect in 2020.
Yes, the markets do hit new all-time highs almost on a regular basis. And yes, the time will come when a recession will come about. However, we do not see this coming in the near future, at least not in the next couple of months. We believe that especially because of the upcoming elections in the second half of 2020, President Donald Trump will move heaven and earth to keep markets on a high. We do also believe that particularly in the one or two months before the elections, volatility will rise further. What happens after the elections depends on the outcome. If President Trump is re-elected, we expect markets staying strong for a little while longer. Whereas in the case of a Democrat becoming President investors might panic a bit because they have to readjust their expectations and, in this process might take money off the table. This scenario could lead to a worse correction than the one we experienced in 2018. Without trying to sound pessimistic, we have to face the fact that following such corrections, recessions are possible. Due to still very low interest rates in most countries, we see equity markets staying quite strong. However, since prices are quite high, we feel that continued upward pressure will not be as imminent as in 2019. Since investors are looking for additional returns on their investments, there is a fair chance that quite some money will flow into precious metals which would bring the prices up again and with them also the prices of mining shares, which have already had a great 2019.
While in 2019 growth and momentum stocks were the big winners, we already saw value stocks accelerate since October 2019. We at WHVP believe that value stocks will be among the winners in 2020. This would mean that Warren Buffet has been right once more and his strategy to hold on to value stocks proves successful. However, since the rally already started last October, the upward trend is limited as well. Nevertheless, we feel that a part of the portfolio should be in value stocks. It is also not too late to realize some gains made in growth stocks and reinvest them into value stocks. We recommend to select companies based on whether they are cyclical or anti-cyclical, what dividend yield they provide, and what their balance sheet look like. Please take into account that we do not advise you to throw out your current investments but rather we want to sensitize you to become careful regarding what you are invested in. As we observed in 2018 – and indeed many other times: when the ball gets rolling it accelerates fairly quickly. Therefore, work with at least mental stop losses and do not shy away from taking some profits even when others say that there is further potential on the upside. Better bring in small gains than incur huge losses.
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The situation in bond markets continues to be challenging. Not many bonds pay an adequate compensation for risk carried. In addition, it does not seem likely that this will change in the near future. Therefore, we face two important questions. What risk are we able and willing to take and what is an acceptable maturity? There is one way, which must be well thought through. Since one of our missions is to preserve you from the depreciation against your home currency, we have the latitude to invest in emerging market currencies. We feel that the US dollar will lose more value against most currencies, initiated by low interest rates in the US. As a result, we see potential in emerging market currencies. However, since we are not willing to take on junk bonds, we are constantly on the look-out for A- to AAA company rated bonds outside the country being issued in an emerging market currency. This way we get an acceptable yield and are comfortable with getting the investment paid back in full. Additionally, if our strategy pertaining to a weaker US dollar comes to bear, we are able to amplify the gains further. However, since bond markets are quite challenging, it is very important for us to manage our risks in these investments properly. Even with our approach to hold bonds until they expire, we are willing and prepared to sell them if the situation of the issuer or the currency fundamentally changes. Regarding maturity: we prefer 3-5 years because we see no reason central banks should raise interest rates in this period. Consequently, there should be enough time to pay interest and at the expiry date to pay back the initial sum by issuing further bonds. The last question is what to do after these five years… But to be honest we feel that it is too early to discuss this now. We have already discussed the outlook concerning currencies in the previous section. To be clear, we believe that the US dollar will lose strength against a broad basket of currencies. Therefore, we are trying to figure out what the winner currencies for the next couple of years will be. At the moment we are focusing on the Swiss franc and the Japanese yen. Additionally, we also see a fair chance that northern European currencies too, have upside potential to strengthen. Other countries that are in a similar position are Australia and New Zealand. Their currencies suffered quite a lot since they are dependent on commodity prices. Since we feel that commodities have the potential to rise further despite current economic measures, we believe these currencies should recover and strengthen in the future. However, the influence of central banks interest rate decisions must not be underestimated. Due to the many uncertainties we prefer the Swiss franc but do still follow the advice of not putting all eggs into one basket.
Precious metals are on their way back. A glance at history suggests that there is still upward potential. The demand for gold has brought the gold price up to US$ 1,550 an ounce and the silver price to US$ 19.5 an ounce. At these levels, mining companies, too, received a boost. Mining companies often serve as a leveraging instrument for precious metal prices. Next to these classic metals, we must not lose sight of platinum and palladium. What happened to palladium is just crazy. Within 18 months it became the most expensive metal. By reviewing the platinum price in the 2010 / 2011-time frame we see some similarities. Since both of these metals are used in the automotive industry, the metals move in tandem since platinum can partly be used as a substitute for palladium. Consequently, we see potential in platinum but are cautious since there are some important chart technical obstacles that have to checked first. Additionally, the price of these two metals depends quite a lot on the economic situation. Therefore, we remain bullish on gold and silver but keep in mind that there are other metals, which might be worth an investment at some point of time. Should you have any questions pertaining to our newsletters please contact us. We would be happy to discuss them with you.
Some additional Reading
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