No, FOMO is not a new detergent, it is an acronym for Fear Of Missing Out. This is also a reason why you do not want to miss this November newsletter, because the past month was largely devoted to FOMO. As an investor you did not know if it would all turn out fine, but imagine that you would miss the stock market rally? You just have to have some faith in that friendly Trump and that gentle Xi. And what about the American sanctions against high-ranking Chinese in HK and perhaps also in Xinjiang province, where the Uyghurs are being re-educated in camps? Does that just blow over?
Political and economic developments
The FOMO camp has come a long way last month. Of course, it helped that the downturn in the German economy seemed to come to a halt and that American consumers kept up their spirits. Would the interest rate cuts by the Fed already have their smoothing effect? And then there were especially those almost daily tweets from Donald, about how well those trade negotiations were going…. though there were still a few details that still needed to be settled…. However, if one dares to criticize Chinese domestic affairs such as HK or the Uyghurs, it is as if you step on the toes of all Chinese leaders at the same time!
A rational investor would certainly have included this grey veil of impending uncertainties in his or her investment decisions and would not have bid up shares as happened. You immediately understand why I have never believed that investors act rationally. Financial markets are the sum total, perhaps even the multiplication of emotions of countless investors. People often let themselves be driven like herds until sobering-up follows. Then news facts are re-arranged and placed in perspective.
So here we are again, on the eve of the third consecutive calendar year, in which various trade wars determine world trade dynamics. I don’t see it coming to an end soon. In fact, in addition to the on-going conflict between Japan and South Korea, our Donald has now also started arguing with Argentina and Brazil and has announced retaliation against France for Macron’s decision to allow American tech giants to pay taxes in France. But you know, Trump also hates to pay taxes, so he likes to pick up the slack for Amazon and Co. And maybe, he said, there will only be a first deal with China after the November elections next year. That way our FOMO can go back in the refrigerator for a while.
Interest rate rise?
Then the time has come for surprises: sstt … don’t reveal, but interest rates are rising … maybe not everyone has had a clear run (think of home buyers), but of the negative long-term interest rate of -0.6% this summer, only -0.15% is left at the beginning of December. One swallow does not yet make a summer, but it’s good news: for the pension funds, but what about the savers? Many banks can no longer wait for this interest rate rise: after the ECB lowered the deposit rate for them to minus 0.5% in September. This increases the pressure to also confront savers with a negative interest rate. I suspect that this will unfortunately become a reality in 2020, especially for savers with a cash balance over EUR 100.000 even when the long-term interest rate has passed its lowest point.
But is the investor’s expectation that the worst is over really rational? Or does it say something about the arrival of Christine Lagarde as the new ECB president and that the policy of negative interest rates is coming to an end? Economists are critical of the negative interest rates and the ministers of the northern Euro-countries are lobbying heavily with her to abolish them. But the bond buying program had just resumed, hasn’t it? Seen in that light, the rise in interest rates is at least remarkable and probably also temporary. But we are happy with it, because we have been carefully positioned here for quite some time yet.
This also counts for our equity weighting where our patience was not rewarded last month of November. December promises to offer more fireworks in this respect. This we leave to others as we are building our positions in illiquid investments. Real Estate is becoming the next chain in our program for which we are looking at, amongst other, on US middle class rental properties. In view of the scarcity in this segment but also for geopolitical considerations we consider this could be a defensive investment. Next to a rental income of 4%, a similar return on top could well be expected in stock-price appreciation. It carries, however, a dollar risk, so a next part of our real estate pool may be considered in another region.
Meanwhile, we are in the most important month for consumer spending. There is now also an investment fund that thinks the internet will win on all fronts and that department stores and shopping centres will be out of business. With the significant Bloomberg code of EMTY, this ETF shortened the shares of the aforementioned retail plays, expecting that stock prices would go down and that vacancy rates would soon go up. The good, if you wish the bad news, is that this strategy has been unsuccessful in the last two years. Some department stores turned out to be able to turn the tide and a number of dead-looking shopping centres are still alive. All in all, this ETF lost a little money and it may therefore take longer for the internet to defeat the regular store
The future of family wealth
Quietly we are leaving this old year and are motoring into the new decade. Providence Capital celebrates its 15th anniversary, mainly thanks to you. After 15 years, we find ourselves not yet thinking about a next generation, but we do notice a next generation in our client base. Introducing the investment processes and considering the future of your family wealth is what we happily stimulate amongst the next generation. Maybe a subject that you might be considering too during these coming days, in all likelihood spent with your family.
May we already now wish you a wonderful X-mas and a very happy 2020.
BY: WOUTER WEIJAND