— Oct 28, 2020


“Plus ça change, plus c’est la même chose”

The more it changes, the more it stays the same as the old French philosophical quotation goes.

Although it was originally meant in a satirical and slightly bitter tone, and we can perhaps all agree it rings true when it comes to politics and human behaviour in general, it can also sum up current markets as essentially little has changed since our last update a couple of months ago.

Sovereign (government) bond yields remain at all time lows whilst global equities, and by that we mean predominantly US equities, are near all time highs. In particular the technology sector continues to outperform just about everything else.

Our view, that US stocks are generally overvalued whereas UK counterparts are undervalued, has not changed either. Nor has our expectation that we expect a correction in the US. The volume of ill-informed retail speculation is a strong indicator that this particular party is about to end.

The one new point that we feel is worthy of mention, is that the possibility of higher inflation is starting to emerge.

Firstly, whilst consumer demand has stayed relatively high as people received money from various furlough and stimulus programmes, production has been restricted due to covid measures impacting factories etc.

Additionally global food production has also been poor. These two factors usually mean higher prices on the way.

More significantly, for the longer term, is the fact that the Federal Reserve has changed policy. This is highly unusual and we are surprised it has not made more headlines in the financial press, though of course coronavirus continues to dominate just about everything at present.

They are now prepared to let the economy ‘run hot’ by tolerating a higher level of inflation before raising interest rates in order to generate more growth and reduce unemployment. Worthy goals one might say, and inflation may be subdued at present, and has been for many years. Nonetheless as everyone who was around in the 1970’s and in the UK in the late 80’s and early 90’s, when interest rates hit 12%, once you let that genie out of the bottle it is difficult to control it.

An increase in long term inflation expectations would have repercussions for all asset classes, but by far the most important will be on bonds. Having enjoyed a near 40 year bull market, maybe finally things will be different for debt holders, and not in a good way.

Finally, we feel it important to once again reflect on one of the key investing lessons this year has driven home: it is rarely a good idea to sell during a panic. Once again we have seen markets diving as people absorb and overcompensate for shock then rising steeply as the panic settles. If you sell out during the panic it will usually be towards the very bottom, when you are experiencing the most pain, and will then sit in cash on the sidelines watching markets rise and feeling miserable. The most successful long-term investors are precisely that – long-term.