— Mar 26, 2020


Global stock markets have continued on their downward path, with the coronavirus prevention measures going much further than could ever have been anticipated and affecting huge swathes of the economy.

Nevertheless, it remains our view that a sharp recovery in both the economy and stock markets is coming. For the first time since the recovery from the Great Financial Crisis in 2008/9, governments around the world are throwing caution to the wind on a massive scale in response to this crisis and announcing huge spending plans (fiscal spending). This is a step change in previous policy of relying on central banks cutting interest rates and buying bonds (monetary policy), the benefits of which have divided opinion since they were introduced.

Austerity policies, if they were ever actually here (deficits actually continued to rise during the period!) have now reversed entirely, to be replaced by proposed borrowing and spending on a massive scale.

Echoes of war time are being made by politicians with their usual pompous verbosity (though anyone who had relatives who suffered or died in World War 2 may find the comparison somewhat offensive) there are analogies to be drawn in the world of investment.

Sir John Templeton, who was called in 1999 by Money Magazine “arguably the greatest global stock picker of the century” made his early fortune when World War 2 began by buying every stock under a dollar in price.

Whilst everyone else was selling, his rationale that war would actually mean a huge increase in economic activity proved prescient. If we are fighting a war now then by the looks of these aforementioned spending plans it will be no different in terms of ramping up a huge boost to the world economy.

With this in mind we have added to alternatives with a purchase of the BlackRock World Mining Fund. We believe basic materials will be strong participants given that the huge fiscal stimulus around the world will be focussed on infrastructure projects such as roads, rail and housebuilding.

Given the UK stock market is heavily exposed to such industrials and materials stocks we expect it to finally start outperforming others. It is a truism that a new bull market is never led by the previous market leaders. and this means that in our opinion technology stocks where the US is strongest may recover but will not lead the market this time.

We therefore remain more than comfortable with our positions of being overweight to the UK and underweight the US.

Interestingly equities in Emerging Markets, which we have added to recently, have suffered very much less than those of the developed world. They simply had less to fall, having been depressed for some time. People have questioned value investing, i.e. buying assets considered cheap on various measures, as growth investing (buying stocks seeing strong growth but appearing expensive on the same criteria) has been a winning formula. In reality it is a little more nuanced than this, but one thing that is certain is that every strategy that succeeds for a time eventually leads to overvaluation as everyone jumps on board.

Finally, another thought for those who seek safety in negative yielding bonds or cash. Sovereign (Government) bonds have been strong performers as investors seek safety. However, if these spending plans are executed expect to see this reverse. Inflating the economy in this way and borrowing heavily eventually means one thing we have seen little of in recent years, and that is much higher levels of inflation.