May was the month in which we commemorated freedom. One can hardly do that better than in a confined environment. Only then does one really understand what freedom means. The countries with the least freedom, the heaviest lockdown, were not only hardest hit economically, but also most affected by the virus. We learned too late that the virus has less chance in open air and that more freedom could also have brought more relief. And we did not quite realize the mental and social damage that a large group of people incur in solitary isolation. That has an impact and affects one’s confidence. It was especially difficult for single people. At the time of writing, we are allowed visits again and we can try to regain our self-confidence. Stock markets already showed the way forward. They seemed to be sending us the message in May that we are “liberated” again and can make steps forward.
A virus makes no distinction, but it does matter under which circumstances you are confronted with its consequences. Does one live in a developed society with good health care, with a well-organized government, a strong currency, a powerful central bank and with a well-stocked treasury? Or in a poor country, where one suddenly has to search for food without having been paid ones daily wages? Where companies can fire at random. The difference in stock market performance was accordingly: Emerging Markets lagged in their recovery versus developed markets. Or, one lives in a country that is both highly developed but where poverty is nevertheless rampant: think of the US, where both political and racial thinking is often just black and white. People are now in all states, but not always in the United… Trump appears unable to build bridges and be a connecting factor in this deeply divided country. A country where millions of people, especially the most vulnerable, were put on the street without mercy. Perhaps these are the circumstances that Democrats will take to heart in the upcoming election, especially if Michelle Obama were to become Joe Biden’s running mate.
“Own people first”, became very evident in this crisis: few countries managed to subdue this reflex, and here again, Emerging Markets and certainly Frontier Markets were the victims. The flow of aid from the IMF and the World Bank is meanwhile getting better, but initially it was every man for himself, unfortunately. It also led to a lot of political tension in Europe, regardless of the concerns surrounding Brexit. Southern Europe was more severely affected, but lacks the financial means and the administrative organization to help companies and citizens well and smoothly. The first problem is easier to solve than the second. As a result of Merkel’s turn towards Macron, Dutch PM Rutte and Finance Minister Hoekstra are now more or less out-maneuvered with their objections towards the introduction of European Federal debt, which has now increased considerably. And if the survival of the euro was already almost inescapable due to the enormous scale of the ECB’s interventions, such a step towards an European fiscal union, however annoying one may find it, will give the euro a firmer foundation. It is no coincidence that the currency has risen in value in recent weeks.
We are in a strange investment climate, because we are still in the middle of an economic crisis. Many investors do not believe (anymore) in – and are very underweight stocks and corporate bonds in their portfolios. The stock market still makes the “V” mark, but “on the ground” the signs of recovery are much less exuberant. Just about everyone agrees on a “U” shaped economic recovery in developed countries. Markets, however, are mainly looking at the huge amounts of money that will soon be poured over us: people are counting on an agreement between the European North and South, as they are between Democrats and Republicans. This involves € 1,500 billion and $ 2,200 billion in taxpayers’ money, respectively. Besides those huge buying programs from the ECB and the Fed… And this till apart from the interventions by the Bank of China and the Bank of Japan, which are also pumping huge amounts of money into their economies.
All this makes it so hard not to do anything with one’s money and just put it all in the bank. And wait until the pandemic is really over and the economy is running again. In fact, as an investor one has to start earlier than as a company. Although, I dare not write these days that one should invest “if the blood flows through the streets”. That would be inappropriate. We recently moved from overweight stocks to neutral. We did not dare to have an underweight equity position, given the price levels and the longer term outlook. But we realize that the economy will first have to go through a lot of misery: from companies that have to write down parts and also from bankruptcies.
And who will be the winner? The old or the new economy? Until a few weeks ago, the Nasdaq was the big winner, with on-line giants like Amazon setting new stock market records. But by the end of May, when the dollar fell and European stock exchanges continued their rally, suddenly banks, car companies and the industrial sector came to life again. Will this finally be the revival of Value shares, which have disappointed us for so long? From a fundamental point of view, it still seems early days, but cyclical stocks are usually ahead of the music. Let’s hope the market is proven right. This will also further advance our positions in corporate bonds and High Yield. At least as important from here is the further recovery of Emerging Markets shares and debt. The signs they will are becoming slightly more visible.
And so we are heading for a post-pandemic world, without restrictions, in complete freedom. Although we will still have to show quit some patience. And do not forget the influence of profit-taking and a consequent temporary decline. Patience is certainly still required in financial markets.
Freedom, equality and brotherhood. Of these three, freedom may seem the most important. We hope you enjoy your regained freedom which we suspect you will value greatly. We continue to make every effort to properly value the financial markets we invest in on your behalf.
BY: WOUTER WIJAND, Chief Investment Officer