— Jul 28, 2020


Despite the devastating effects of coronavirus on the global economy, it may surprise our investors to know that the models 3-5 are now almost where they were at the start of the year and model 6 is not far behind.

Four of the five models continue to outperform, the exception being the all equity model 7 (where our underweight to the US and overweight UK position has yet to deliver, though we are increasingly confident that this will happen).

This outperformance has been due to a number of factors, not least our avoidance of all things speculative; particularly heavily indebted companies. An exposure to gold, which has risen during the pandemic, has helped along with significant cash balances going into the crisis. Part of the cash balances have been put to work in the thematic areas of healthcare and technology and they have thus far proved very rewarding.

Many investors may be more than a little surprised and perplexed by the overall rebound in global stocks, given the disconnect between this and the actual current state of the economy. This is understandable given the anecdotal evidence and continuous economic bad news spewed out by the media.

However, perhaps the first question, if one were to write off 2020 completely economically, is how much less is a business worth if it loses one year’s earnings?

Well the answer according to Bill Miller (an American investor famous at one point for beating the S&P 500 for 15 straight years and who often has a distinctly original way of looking at investments) is surprisingly little, at around 6% less.

Equities are long duration assets and investors buy them for many years of earnings rather than just one year (though the investment community in general fails to recognise this with its frenetic trading and obsessive focus on the very short term).

Accepting this, the natural rejoinder would be that this presumes the business survives. Of course this is true, but, here is another point to consider: Stock markets reflect big business rather than small. Huge multi billion pound companies make up nearly all of the value of an index.

So whilst it is desperately unfortunate that many small businesses will be fatally wounded and never reopen, the large businesses with the resources and access to additional shareholder capital are able to continue and in the process pick up the custom from the smaller businesses that have gone bust.

So in effect what you are seeing is a huge transfer of wealth from small to big business. It may be unintended, but this will depress innovation, productivity and economic growth in the long term.

Finally, and perhaps most importantly for investors to understand, and one that we have emphasised many times previously, is that the stock market is a forward looking indicator rather than a rear view one.

The past does not matter. It is the future that is important. And are those future prospects improving? Is the worst behind us? The stock markets are saying it is.

Having stated all that, we believe that markets (particularly the US) are due a short term correction for one simple reason: the rise of a new army of day traders.

These trade on a free share trading platform called Robin Hood (though for technical reasons it is not actually as free as they are led to believe). The key point is that these amateur investors started buying in when the markets were on their knees in March and have since become emboldened by their successes.

They have been dealing in the well known names like Tesla and Netflix et al and even companies in the midst of going bankrupt like Hertz and making money and proclaiming how easy it is.

Well, as anyone with any experience in markets knows, it is decidedly not easy to make money and whenever people think that it is, it means there is a lot of speculation and froth in the market and that they are destined for a rude awakening.

It sounds harsh to say that they will need to be wiped out, as they surely will be, before we can continue to make further progress, but then markets are harsh.