Newsletter March 2020

Like a dark shadow, the corona crisis does not only leave its medical – but also its economic traces around the world: slowly, from East to West. Not the weakest link, but especially the last link (the US) determines how long the misery and stagnation will continue. Because even if the Chinese are allowed back to work again whilst Europe and the US are still switched off, they cannot immediately get rid of their products. Not all countries have opted for a lock down or isolation of which Sweden and Belarus are examples. We will only know much later whether this was sensible decision. But from an economic point of view, we live in the same global trade constellation and if almost everyone chooses to lock down, it will also hit each country that wants to continue operating. After all, products for export are impossible to sell.

So politicians have made their choice and soon found central banks on their side. That was not any different from the previous crisis in 2008/09. What different is this time is the unprecedented financial commitment to close the gaping economic gap for the foreseeable future. An additional government debt of 10-15% of national income for the US and Germany respectively, are possible outcomes, which seemed unthinkable until recently.

The Treasury is therefore being called upon en masse to help both the population and the business community. Understandably so, but it is also almost taken for granted that the central bank will replenish the Treasury. The risk of monetary financing is clearly lurking here. The ECB does something like this for Italy, but only through the public bond market. But without the country limits that applied until recently. The sky is now also the limit for the ECB. Moreover, the rules of the Maastricht Treaty have also been suspended, so budget deficits in Europe will rise rapidly.

So how about our Euro project, you will be wondering? Surely the ECB cannot continue to buy up the debts of the southern countries indefinitely? And what happens if Italy does not repay? Can we as northern countries continue to pay for these losses? No, we cannot and for that reason we have not allowed the issuance of Euro or Corona bonds. It’s the ECB that has in fact become our corona bank. Our European fiscal unification has certainly not yet officially taken place, but in fact we can hardly go back. We can actually also no longer leave the Euro, the ECB’s purchases have become too big for that. The corona crisis may well have secured the survival of the Euro!

At the same time, we have entered a new phase of monetary and fiscal support, which does not look very solid. In the long run, so much extra debt, so many extra bonds on the market, entails risks for inflation and interest rates, when the world has normalized again. The current generation is now being paid the billions that the next generation will have to pay back. Maybe this is the appropriate time to inform our children. Otherwise they will come and ask us in about 10 years from now: what happened, Dad, Mom, back in 2020…

At the same time, this support gave courage to stock markets: sentiment turned after a 35% fall in Europe and 30% fall in the US. A rapid recovery ended the month with a minus of around 14%. It was a wild ride, sure, but what did we do on that rollercoaster? As mentioned earlier in our interim newsletter, we bought shares at ever lower levels: 2x worldwide and 1x in Europe.

In the meantime, the unrest had also spread to the bond market: interest rates on corporate loans in particular rose sharply. Our first action here was to purchase good (investment grade) quality corporate bonds. We managed to purchase these close to what looked like the bottom. Our second purchase took place just after the end of the month, on April 1, in High Yield bonds. Here the credit risk is a lot bigger, but we think that the interest margin of 9-10%, against about 3% before the crisis, compensates that risk sufficiently. Now they can resist a beating, in fact, hopefully they have already had one.

In this anxious time, we are looking for bargains, which may not be paying off next week, but look attractive on a of 1-2 year horizon. We do not have the illusion that we will buy on the bottom every time. However, we try to make our purchases as much as possible on sad, “red” trading days. And so we ride out this rollercoaster. We do not know how long the ride will be. But when the dust settles and the world resumes its normal course and everyone is allowed to go outside again, stock markets may be in a more upbeat mood. This is how we try to get through it and hope that this also applies to you: with your family and let’s not forget your company. It is a time for all of us to rig our sails, to stay the course and try to limit damage, but also a time not miss the boat when the wind will blow again from the right direction…

In that thought, I greet you on behalf of the entire team, expressing the hope that you will stay healthy during this testing period.

 

Wouter Weijand, Chief Investment Officer

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