John Townsend’s Investment Opinions September 2022

The day is short, the work is much, the workers are lazy, the reward is great, and the master is pressing. It is not incumbent upon you to finish the task, but neither are you free to abstain from it.  

Rabbi Tarphon in the Mishnah. Pirkei Avot chapter 2 (Ethics of the Fathers)

The Russian invasion of Ukraine, following on the heels of the Covid pandemic and adding to price inflation has caused deep uncertainty in the investment markets. In times of severe insecurity, the instinctive reaction of the inexperienced investors is to sell as many of their investments in the affected areas as possible, especially those positions that were bought with borrowed money. At present, institutional investors have been heading for the safe haven of the US markets to invest in treasuries and large corporate equities.

Politicians in the West have tried to hold together in the defense of Ukraine though some voices, especially in Italy, and among some major German companies, have tried to press for a peaceful settlement where Ukraine should give up its territory, thereby giving the Russians a reward for their aggression, and at least reducing the risk of war albeit temporarily for the rest of Europe.

The Russian economy is weak and has been further weakened by the invasion. The threats from Moscow have become ever more blood curdling reflecting the increasing weakness of their position, up to and including the use of tactical (i.e., small) nuclear weapons on Ukraine itself, even if they are probably bluffing. The threats are more for the benefit of a domestic audience who have no alternative information sources but are noticing the casualties among their sons who have been poured into the furnace of a war. There is at present no viable opposition in Russia that has not already been locked up, so alternative news is hard and dangerous to come by. The propaganda from Moscow may be palpably wrong, indeed it may be utterly the reverse of reality, but it is hyperbole aimed at encouraging the home audience and discouraging the weak at heart in the rest of the world.

Russia is benefitting from the high prices its energy exports can achieve in those markets that are still willing to buy their oil and gas, for instance India, in place of its exports to Europe. Russia is also trying to assert itself by turning off the gas supply normally delivered by the Baltic pipeline Nord Stream 1 and thereby putting the European governments and their economies under pressure. Western Europe, having become complacent about the lack of diversification of gas supplies has been suddenly shaken by this move which has caused gas prices to soar by up to 10 times their previous levels. This move will not be long lasting, but it causes concern. The ensuing panic and the search for alternative sources of energy to circumnavigate the problem will cause much more rivalry and much less concentration on the real issues. The pressure is on in some political circles to abandon Ukraine and to gratefully resume taking Russian gas. Surely it would be better to remove the temptation to surrender for some European countries and buckle under the pressure and instead simply blow big holes into the Nord Stream 1 pipeline and its completed but not yet commissioned sister project Nord Stream 2 pipeline which was in any event a vanity project by a previous German chancellor which his successors did not have the courage to cancel, thereby removing them as an obstacle to finding a more logical and longer lasting solution to a diversified energy supply problem.

The equity market investment peak was reached in December 2021, after a period of increased volatility. European smaller companies (those with a market capitalization of between 300 million and 2 billion Euros) suffered severely as the search for quality and the covering of short positions took hold. I believe that the market ‘s low point was probably reached in September 2022, but unlike the rapid recovery from the Covid scare of March 2020, there is still plenty of room for panic and downward jolts and the recovery this time is likely to be much slower,

Rising energy costs help to fuel household and industrial inflation which in turn need to be brought under control. Western central banks, after a period of supporting the markets with additional liquidity and quantitative easing during the covid crisis are now reversing their actions by raising interest rates and slowly disposing of the bond purchases which had been used to give liquidity to the markets. The danger is always that the difficult times occurring now in the various markets will be emotionally extrapolated into the future, whereas they are unlikely to last for the long term.

A recession in the USA has probably already started and a recession in Europe is likely to follow by the end of 2022. However, the employment figures in the USA are encouraging and indicate a near term increase in demand. The strong boom years we have just experienced, have filled warehouses with inventories that need to be sold to make room.  The economic recovery from the Covid shutdown will mean however that the recession will be quite mild. This is a time to look for value in the markets rather than to focus on the companies that have generated earnings growth for so long. Indeed, some companies can fall into both camps. It takes a competent fund manager with a good analytical team to find the right quality investments.

A recession, even a short-term recession, has an impact on the daily lives of everyone. Equities can lose their value or simply stagnate until a recovery begins. In the meantime, house prices will begin to fall from their already very high levels, as the money to buy properties is more difficult to borrow and consumers begin to worry about their ability to service debt. This is likely to be a mild recession however and the discomfort will probably be short lived.

In China, the attempt at a zero covid policy by locking down whole cities has had a deleterious effect on the planned economic growth rate. In 2021 the Chinese economy grew at 8.08%, which greatly exceeded the centrally planned target. In 2022 this growth rate is likely to be 3.3%, the lowest in more than 40 years, according to IMF figures, and is expected to grow to 4.6% in 2023. Within China, domestic and industrial demand will continue at a lower level than in the past, but the economy is huge, behind only that of the USA. China is still an investible opportunity and brings with it investments in other Southeast Asian economies.

The five stages of grief are denial, anger, bargaining, depression, and acceptance. This can also be seen in the current investment market. Bargaining was seen in the summer of 2022 when investors hoped that that the central banks would be gentle with base rate rises, which were in any event inevitable. They weren’t, so now investors find themselves somewhere between depression and acceptance. The developed market central banks seemingly had concerted programs of policy tightening, with base rate rises have coming in increments of 0.75% instead of the normally gentle 0.25%. The Federal Reserve has made it clear that it is willing to go much further in raising rates, if necessary, which is having a dampening effect on equity investors too. The tech stocks which grew so rapidly in early 2022 and formed the mainstay of the MSCI World index, benefitted from leveraged investors who are now bearing the brunt of diminishing credit availability and suffering from forced liquidations.

The fabled FAANG stocks, which are major components of the MSCI World index and together are an acronym so called after the US technology companies, Facebook, Amazon, Apple, Netflix and Google, have now become MANTA stocks, now Microsoft, Amazon, Nvidia, Tesla and Alphabet. Facebook, now Meta, has been downgraded in importance as has Apple. These stocks found favour with investors and were busily over bought. The inevitable over enthusiasm could not be extrapolated into the future and, like the Dutch tulip mania of the 17th century, it imploded when common sense prevailed. These companies do of course have their value and their logic, just not at the over-inflated price levels they reached during the craze.

Investors should not panic, and above all should stay invested at this time. The investment markets have already priced in the coming economic recession at least in part, by staying invested, investors will then move onto the final stage of the grieving process with an acceptance that the boom markets of last year are not going to be repeated in the near future. The news is uncomfortable but is not a cause for panic. Competent fund managers with the experience of many years of the ups and downs of economic and political upheavals will rebuild stability into their portfolios and profitable investing will resume, albeit at a lower level than in the recent past. A broad distribution of risks will also allow for stability in the yields of portfolios.

Investors should also resist the temptation of investing in the get rich quickly sectors such as Cryptocurrencies and other similar bandwagons. Recent history has shown that it is perfectly possible to lose most or all of an investment in this gamble. The coming years will still have profit potential, but not at the extravagant levels of the past.

The watchword remains; stay invested, but carefully diversify risk and avoid over concentration in any one sector.


Past performance is not a guide to and cannot guarantee future profitability. The value of investments and the income they generate may go down as well as up and investors may not get back the amounts they originally invested. All investments involve risks including the risk of possible loss of principal.

John Townsend advises the clients of Matz-Townsend Finanzplanung with their investment portfolios. He is a fellow of the Chartered Institute for Securities and Investment in London. (

John Townsend’s Investment Opinions February 2022

There are decades when nothing happens and then there are weeks when decades happen. – Vladimir Lenin

The Russian invasion of Ukraine is a human tragedy ordered by an elderly autocrat with no popular support and will result in a great deal of innocent suffering. It is at present unclear how it will evolve, but it is likely to lead to the internal destruction of modern Russia. The events in Ukraine have changed the world, probably irrevocably, but we have seen crises before, and they have been met and mastered. It is important not to lose one’s nerve.

This paper does not set out to minimize the disaster, but rather to recognize the effect that this action will have on my clients’ investments. Clearly however, now is not a time for politicians especially, to be over friendly towards Russia and some political parties, in Europe especially, will lose their popularity. As it is, past pro-Russian politicians are issuing a deafening silence or are running from their erst-while ally.

The investment markets are unemotional when it comes to wars and human suffering. Past experience has shown that the aggression that we have seen since 24th February, as long as it occurs away from the global economic and financial centres, is not necessarily considered a disaster.

The traditional emotional response to international aggression is to react with fear and then sell one’s investments. Indeed, there is an international index known as the VIX, which tracks the expectation of volatility expected by traders in the US S&P index over the forthcoming 30 days. However, this would not necessarily be wise, despite the wish to show solidarity with the people of Ukraine and will hurt only the investors themselves.

And yet… tensions between Russia and Ukraine have heightened over the past weeks and the VIX index has risen sharply. Using the reverse of an old adage, the investment markets have been selling on the rumour and can now be expected to buy on the fact. On Thursday 24th February, the VIX closed at 30, well above its average since 1990 of 19. This is a sharply higher than the level 17 at the start of 2022. As the war progresses and casualties mount, the increasing sanctions against Russia could cause even this level could be exceeded.

The global investment manager Schroders points out that rather than being a time to sell, historically, periods of heightened fear have investors have in the past earned the best returns. To quote Schroders “On average, the S&P 500 has generated an average 12-month return of over 15% if the VIX was between 28.7 and 33.5, and more than 26% if it breached 33.5.”

Europe, which was just beginning to regain its economic composure after the Omicron/Covid pandemic is likely to suffer some weakness and a delay in its recovery in the next 2-3 months. However, once the situation becomes clearer economic growth will resume.

The uncertainty will bring with it a downturn in corporate growth. It is likely that Russia will drive energy costs much higher at least for a while. The big oil companies will drive the price of fuel at the pumps higher without much encouragement. Globally the economic impact will less hard-felt, though the belief in a short period of inflation before a return to normality is now likely to scotched.

The USA is likely to be less effected by events in the Ukraine. Especially as US growth has begun to rebound strongly. Much the same is true for China and the emerging markets, though slower economic growth in the developed world will affect these areas too. The US Federal Reserve, which had signaled aggressive interest rate rises in 2022/3 will probably wish to be more careful. Europe, being closer to the centre of the crisis is unlikely, after all, to want to raise interest rates for the foreseeable future. This will support companies and encourage investment even if it does also encourage continued inflation.

Assuming no warfare creep outside Ukraine, after a period of reflection, perhaps three or four months, the investment markets are likely to return to their pre-crisis trends and activities.  Post-Covid growth in Europe will probably resume; such growth has been held back for too long and is bursting to get out, so growth here could be quite strong.

The attack on Ukraine is likely to leave Russia itself badly scarred. Economic sanctions, as long as these are adhered to by all players in Europe, Asia and the US will prove expensive for the Russian people and could cause dissent there. It is worth remembering that the decision to attack was not a popular one, the Russian people were not consulted and have only to pay the price in terms of dead soldiers and economic shortages.

In the long term, again barring a military spillover from the present warfare there is unlikely to be an impact on European economies. Russian teams have become expert at Cyber-attacks on the West, whether companies or governments. It would be a surprise if these were not increased in the near future. The clear message will be the need to diversify away from a dependence on anything Russian, especially energy. This will further encourage the growth of renewable energy as well as nuclear power stations. US natural gas, delivered by sea will probably become interesting again especially as the Russians can so readily affect oil and gas prices.

It is possible that Russia will take over the Ukraine and the Russian Kleptocrats against whom personal international sanctions have already been announced, could take over the resources of the Ukrainian raw materials. This would be a major blow to those who sought to westernize the country. The cost to economic growth in Ukraine and possibly Europe will be immense.

Past performance is not a guide to and cannot guarantee future profitability. The value of investments and the income they generate may go down as well as up and investors may not get back the amounts they originally invested. All investments involve risks including the risk of possible loss of principal.

John Townsend advises the clients of Matz-Townsend Finanzplanung with their investment portfolios. He is a fellow of the Chartered Institute for Securities and Investment in London. (

John Townsend’s Investment Opinions April 2021

All I can say is that on this earth there are pestilences and there are victims– and as far as possible one must refuse to be on the side of the pestilence. ― Albert Camus, The Plague

A number of important factors have impacted on investors so far in 2020/21. These will have long lasting effects.

The COVID pandemic, featuring incompetent populist politicians with total policy paralysis thereby carelessly condemning many of their fellow countrymen to unnecessary suffering, is the pressure presently most in the news. In the USA, the era of incompetence, responsibility-shirking and name-calling has come to an end and the new president is proposing serious legislation to help the people and US infrastructure rather than a few party donors. An aggressive political and fiscal policy will help the country achieve a pole position in terms of economic growth.

The world goes on despite the pandemic. People fall ill and die of other ailments or accidents, economies thrive or falter and investors seek to make a return on their capital and continue to take risks they are unable to recognize.

In Britain, the appointment of a competent administrator to take charge of the vaccination program has produced remarkable results with a rapid vaccination programme providing lifesaving coverage. This has however, left unled and directionless politicians to continue their habit of stabbing each other in the back, breaking their word to their own countrymen and to foreigners and the private profiteering from contracts and connections in a depressingly undistinguished way. It is another sign of a malaise that will ultimately drive investment and employment out of the country.

European countries, which have produced world beating engineers, scientists and philosophers have become swamped in a bureaucratic quagmire resulting in a complete lack of syllogism and have therefore been unable to produce dynamic measures to fight the pandemic resulting in countless unnecessary deaths. Too many commentators are now trying to make half thought-out political capital by opining against the advice of scientists and doctors and demanding an immediate relaxation of lifesaving lockdown measures. If one looks hard enough there is always some so called expert or professor, normally from a lesser-known institution who can be quoted who will try to prove whatever opinion slant that one wants. Such idiocies are hard to avoid.

Let us be clear, there will be no freedom from the pandemic, at least in its current form, until everyone in the world, as well as in our own countries, has been vaccinated against it. Individuals should not have the freedom to opt out of a vaccination just because by the fact of others having it, they do not need to. Long term recovery and the reopening of shops, concert halls, sports events and markets depend on the rollout of vaccines now and if necessary, repeatedly in the future. Any complaints at a delay in reopening the economy should be placed at the doors of incompetent bureaucrats and the politicians who hide behind them, not at the municipal leaders who try to keep their people safe.

The initial financial recession in March 2020, which was a result of a reaction to the pandemic, was effectively met and was quickly over thanks to the concerted actions of international central banks who lowered interest rates and made financial liquidity available to companies and private consumers alike in order to limit a collapse in demand as well as industrial supply.

Central banks have accepted the fact that drenching their domestic markets in liquidity will cause inflation.  The level to which inflation will rise cannot presently be measured. In general, 2% is held to be healthy in a normal environment, though the central banks are disingenuous in suggesting that that level should be seen as a long-term average. In the short term, expect inflation to rise to over 5% before beginning to fall back. The inevitable result of very low or negative interest rates will be the formation of financial bubbles. We are already seeing a jump in house prices with purchasers assuming that they can cope with large but low interest rate mortgage loans. The danger, if not the certainty, is that purchases made in this environment will lose value sharply when normal economies and interest rates resume.

While western economies were and are focusing on the pandemic and its effects, it is China, where the first mitigating steps were taken, that is emerging with a strong economy. The Chinese are refocusing on meeting internal demand for investment in consumer durables and consumer discretionary spending while also producing ever more goods for export to the rest of the world.

Economists are undecided as to whether Chinese domestic growth, which to a large extent comes from production growth and wage spending will be 6%, 8% or even 10% in 2021 and will remain at a similar level in 2022. All however agree on the fact that the Chinese economy is booming and that it is providing life and support for the economies in neighbouring countries too, much as the USA did several decades ago. We are truly entering a Chinese dominated Asian era.

In western popular culture this Chinese economic strength causes perceptual problems. China is now seen as a threat to its neighbours. The treatment of its own minorities causes unhappiness in the West. There is a view that China should behave the same way as western countries do now, all the while forgetting that Chinese actions today reflect the way the colonial powers, including the USA, treated their minorities only a few decades ago when western economic growth was taking place. We may not like it, but we cannot deny that we too undertook similar measure to build our economies in the past.

A new global economic cycle has begun. It is radically different to and potentially more fragile than any cycle we have experienced before. It was caused by the severity of the pandemic but is also vulnerable to a reemergence of the virus in a different and unexpected form to which we do not, at present have a solution.

The brakes to the international economic system come from different sources. First of all, there is a shortage of skilled labor where too many people have remained untrained or have been trained in the wrong skills. Producing and service companies cannot meet the new demands made of them. China also has a shortage of high-quality steel. Much is made of the export of Chinese steel at dumping prices, yet the reality is that China desperately needs the quality of steel they cannot at present produce enough of themselves and the country cannot use all the low-grade steel it does produce.

Raw materials too have their shortages. I have often argued that Copper is a bell-weather raw material showing how industrial production in almost every form is performing. Energy too, including the use of wood and bio methane to fuel power stations and homes is in sharp focus. One has also to be aware of the costs of transportation as seen in container shipping rates. The European Union’s Green Deal, which has just been announced, is aimed at reducing Carbon Dioxide production to zero by 2050. 73% of carbon dioxide production is related to the present production of energy, but there are political comprises at play here too. There is an emotional backlash, especially in Germany, to the production of electricity using nuclear facilities. This is still an environmentally efficient source of energy and its use will be accepted by some countries and rejected by others.

The European Union has also imposed a series of sustainability regulations for investment, especially under sections 6, 8 and 9 of the European Eco-Initiative. The political aim is to force the investment sector to become more ecologically aware. Once the fund companies themselves can be prevented from ‘greenwashing’ and mislabeling their funds, this will doubtless have more of an effect. At present it looks like a triumph of hope over reality.

There is no alternative to investing in Asian and US Equity markets, with some excellent European Assets thrown in for good measure. Still, it is absolutely essential to have a very broad distribution of assets in case a new version of the pandemic strikes home. There is little to be gained in having fixed income investments, other than to provide a source of stability to a portfolio; they yield very little without the investor having to take unnecessary risks. Funds investing in convertible bond issues can be a valuable source of distributing risk. Cryptocurrencies are a disaster looking for somewhere to happen and while presently fashionable, are best left to ambitious school and university students who have yet to learn what it means to face unnecessary and unexpected losses.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the

Chartered Institute for Securities and Investment in London. (

John Townsend’s Investment Opinions December 2020

I’m not upset that you lied to me, I’m upset that from now on I can’t believe you.” Friedrich Nietzsche

The changes coming with the new year 2021 are now apparent.

Firstly, the chaotic one-man government of the United States has been voted out and is to be replaced with a new, hopefully more effective and reliable leadership which can begin to repair the damage done to the image, overseas trust and economy, inflicted on the country since 2016. It seems that the Russian influence on the American president has realized its desired effect of bringing economic and political chaos and has left the western world in a much weaker and leaderless political situation than it was before 2016.

President Trump is not letting his clear defeat at the polls get in the way of his self-publicity or the truth. One is reminded (as someone raised in the United Kingdom) of seven-year-old boys playing cricket who, when bowled out or caught, throw their bats down and emit a wail of ‘it’s not fair’. In truth, it seems that the outgoing president, faced as he is with impressive personal debts, is raising as much money as he can from his supporters while the going is good. Ever the showman, he is whipping up the hysteria of his supporters in the face of a complete lack of evidence that any part of the Presidential election was amiss. To quote Adolf Hitler, “If you tell a big enough lie and tell it frequently enough, it will be believed.” Students of modern history may see parallels between the propaganda in Washington DC today and that spread in Germany in the 1930s and 40s.

Once the US president had declared the existing Transpacific Partnership (TPP) agreement, itself signed by the United States in February 2016 to be over, China pulled the remaining members of that agreement together and agreed a new pact called the Regional Comprehensive Economic Partnership or RCEP.  The aims are much the same as before albeit with the danger that the Chinese Belt and Road Initiative (BRI) will be strengthened. There was no real logic in pulling out of the TPP, except to cause economic chaos. This is something that benefits really only the Russian government.

Russia is itself no economic powerhouse and cannot afford the competition that big spending by other countries produces. It can compete only by discombobulation and chaos. Quite how they were able to control the actions of the present US president who effectively dismembered the protections that might have prevented the Russian computer hacking of US governmental agencies may never be known, but the disfunction created by President Trump has severely damaged the economic interests of the United States and has weakened the links with the US traditional allies and trading partners. These can be rebuilt but it will take time and the relationship will never be as trusting and strong as it once was.

The position of the United States in the world setting will also not be the same again.  The US dollar, in the past the main safe haven currency, has fallen in value against other major currencies such as the Euro and shows no sign of recovering. The much-vilified China has been strengthened economically, just at the time when the vision of its leadership was being questioned. China, far from having been weakened, is now expected to become the world’s largest economy by 2028, (where before Trump it had set itself the target of 2049). The Asian region as a whole is likely to benefit from this position, though there is an ever-present danger of overconfidence and corruption in the smaller states which could cause economic disruption.

India, Chinas traditional competitor is forecasted to experience economic growth to the point where it will emerge as the world’s third largest economy by 2028.  India is however less determinedly efficient than China and while it is an economic powerhouse there is still much that can go wrong politically which will hinder economic growth.

The Corona virus is taking its toll of the economies of countries across the globe. The fact that investors have not shown the concern that one might have expected, is due to the fact that looking at a two- or three-year time horizon, consumer and industrial demand is expected to have recovered and the present weakness will offer positive growth opportunities in the near future. A few vaccines have been approved and several more are in the pipeline.

How long they will provide protection is still unclear, but they bring with them the hope that the markets need. Emerging economies are likely to be the last to benefit from the vaccines and will probably therefore suffer longer.

The United Kingdom is now reaching the end of its departure from the European Community. This self-inflicted injury will bring economic weakness internally, with ructions from Northern Ireland, Scotland and Wales, whose interests have been sacrificed by the London-centric politicians who tell a good story about protecting the whole of the United Kingdom. The interests of the City of London, still one of the great financial centres of the world and a major source of external revenue for the country, have also been weakened, mainly because the present British government simply does not understand the significance of this market.

The European Community finds it difficult to speak with one voice and to travel in a unified direction, with countries such as Hungary and Poland determined to push their own internal political policies against the wishes of the remaining members. The big paymasters, Germany and France are unable to bring sufficient pressure on their recalcitrant colleagues in order to maintain European Unity and there is therefore a risk political paralysis. There are still some excellent companies in Europe, but the danger of economic weakness in the region gives cause for concern in the medium term.

Interest rates have been lowered to zero and below by international central banks which have been ensuring that there is more than adequate liquidity in the global economies. The US Federal reserve for instance, is buying some 20 Billion Dollars of assets A MONTH and shows no sign of slowing down. This is a balancing act, providing support while avoiding too much inflation. It is unlikely that interest rates will rise in the foreseeable future, there is simply too much liquidity. It also means that there is little to be earned from investing in government bonds, other than for use as a stabilizing position in a larger investment portfolio.

Where does this leave investors in 2021? The investment markets are likely to be calmer than they were in 2020, with more optimism and feelings of security.  The optimism will bring with it a stronger economic growth, albeit with lower real yields in investments than were earned in the past.

Chinese competition with the United States in almost all sectors will encourage development in the global supply chains, bringing more efficiency in the delivery of physical goods and also financial services. Emerging countries are likely to benefit from being able to supply the growing demand for their goods. A new US government will not ease the pressure on China, even if the message is less strident and the actions more skillful than in the immediate past. The Chinese will equally not ease on the competition with the United States and will fight for dominance in supplying the emerging markets with high quality Chinese goods.

In the United States, there is already an increase in the number of ‘Zombie’ Companies, whose incomes have not exceeded their interest payments for at least the previous three years. The debt of these companies superficially offer higher yields to investors, but these companies will inevitably fail and like the junk bond markets of the 1980s, will take investors’ money with them. The United States is now a deeply divided nation, both economically and politically. The healing process will probably take years. The effect of the Corona virus and its mishandling by the US government is akin to a natural catastrophe with very severe damage that will leave deep scars and will also need a generation to recover from.

Let us be clear, there is absolutely no alternative to investing in Equities. The changes we have seen and will see in market conditions and opportunities can only benefit those companies which are capable of working efficiently. One has to look for quality in the equities and in the funds that invest in them. Merely following an index with ETFs is not enough. Banks, especially European banks have avoided the changes they should have undertaken years ago. They cannot earn from their traditional income sources and will be forced to merge of fail.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the

Chartered Institute for Securities and Investment in London. (


John Townsend’s Investment Opinions June 2020

Intelligent individuals learn from everything and everyone, average people from their experiences. The stupid already have all the answers.” Socrates

The financial crisis started by the reactions to the global Coronavirus pandemic calmed down as quickly as it started. The panic which caused investors, both institutional and retail, to attempt to sell every asset that they had irrespective of price, ended almost as quickly as it began with institutions in particular emerging blinking into the cold light of reality. The sentiment that caused massive panic is now working the other way and combined with government support, is causing investors to re-invest. This is often called a ‘bear market rally’. The major problem here is that such sentiment is fragile and could easily turn negative again. If as expected, a second wave of corona infections emerges at the end of the summer, prices will fall again if a second pandemic surge becomes apparent, but they will then resume their slow and laborious path upwards.

While many equities have recovered strongly, some bond-based assets still have a way to go because interest rates have now dropped to zero and below. The frothy levels of 2019 will probably take at least two years to be reached again. In the meantime, nervous investors will encounter more shocks in the months ahead and may react with less fear than before but will none-the-less feel inclined to sell some of their assets. Long-term investors could use this phase as a time to buy at the lower prices.

The crisis has treated many geographical areas differently. Developed Asia saw a disciplined reaction to the pandemic and is now recovering.  In Europe, the systems which had been developed to manage pandemic risks failed and internal and external geographical borders were closed. These systems will have to be reconstructed, especially as the virus which caused so many deaths has not been defeated. The reaction in the USA, dependent as it was on the whims of one man seeking to adjust the facts to aid his re-election, was tragically too little too late.

In the meantime, in order to support the economies and to prevent the economic collapse of banks and system relevant employers, western central banks and their governments have announced massive debt increases. This largesse will be passed on both in the form of outright grants and soft loans. Whether this will be enough and indeed whether the right targets will have been hit by this support remains to be hoped for.

Globally the world has already seen over 400,000 COVID-19 related deaths. This figure is probably too low, as some countries are simply lying about their figures for political and doctrinal reasons or not recording the deaths at all. The death toll will undoubtedly rise as political buffoonery in the USA, some parts of South America and indeed the United Kingdom continues unapologetically unchecked.  A study from Imperial College London suggests that the overall European death toll without a severe lockdown would have been at least 3 million higher. The virus will in time be controlled, but never eliminated. A vaccine is hoped for and is being worked towards but is unlikely before the end of 2020.

While the equity markets have begun to recover, the initial recovery phase is partly a recognition that the markets fell too far too fast during the first wave of the crisis in March 2020. The deepest point of the financial collapse was 23rd March, but the political reaction in the USA was initially based on the hope that the problem would miraculously disappear if ignored for long enough. Even now it is unclear what US government policy is actually going to be.

The US Federal reserve has advised that it sees a need for an increase in debt of up to 3,000 Billion US Dollars, but the recently announced unemployment figures which were much better than expected, might cause a revision in this figure. These statistics themselves are open to doubt. The US has a history of revising statistical data after they have been announced and the headlines have been made. The present figures seem to be politically supportive of the present president.

The European Central Bank, under the headline TINA (There Is No Alternative), has devised a plan to provide 1,250 Billion Euros of support to financial markets across Europe. The ‘frugal’ states, Austria, the Netherlands, Sweden and Denmark might still block or reduce the package, but their governments are acutely aware of the crisis facing the region. This is no time to be bashing Greece, Italy, Hungary or the South-East European states.

With so much more debt hitting the markets, there is a massive oversupply of debt obligations, just as interest rates are either near Zero or in some cases negative. Some institutions, especially pension funds, will have to invest in this paper, because they have no choice under the terms of their trustee agreements. Others will switch to the Equity markets. The dependence on skilled credit analysts to distinguish between healthy companies in different sectors and ‘zombie’ companies kept alive only by high debt levels has become acute and will be ever more so as high yield debt investors look for positive returns for their portfolios. There has been nothing in the last 30 years with which to compare the current position. Analysts will need to become original thinkers!  Average corporate earnings in the US appear to have fallen some 20% since the crisis began, but investors should be warned that this seems to be a ledge stopping the fall and could crumble if there is a second wave of the pandemic.

The COVID-19 virus (or Coronavirus SARS-CoV-2 to give its official name), neither knows nor cares whether states or individuals take precautions against it. The odds of a second wave are at best 50:50, whichever way one looks at it. A second wave will be met with the experiences that society has gained form battling the first wave, so the reactions will probably not be quite so strong.  The effect of a second wave will however be to slow an economic recovery. Many announced governmental measures are designed to show willing rather than meet a real economic need. The announced 6-month reduction in VAT or ‘Mehrwertsteuer’ by 3% in Germany will in truth have only a minimal effect, but it looks good.

There will be enduring changes in global economic development, which will cause the recovery to take longer than hoped for. The Chinese economy has reopened for business, but with a politically rather than economically motivated trade war restarting before the next US presidential election, there will not be any great advance in activity there or benefit to global trade. The world has treated China relatively gently in past years, in the hope of gaining some economic benefit. This has now stopped and Chinese companies such as Huawei will face very close scrutiny.

Banks as a whole will need to become more efficient. One recent estimate suggests that up to 20% of global bank jobs will disappear altogether with digitalization replacing some 40% of the administrative positions. This will undoubtedly cause unhappiness amongst the inefficient German banks which are in any event under pressure to merge.

The European economic recovery, even without a second wave, will be affected by the realities of domestic life. Some people will have to stay at home, because the schools have not fully reopened and someone has to look after the children. The ‘new normal’ will have to wait for reality to take over.

Some companies, such as the German car builders and other engineering companies will need to reflect on the reduced demand for their existing products and consider how to attract new customers.

The press and many pundits suggest the shape of a recovery in terms of letters of the Alphabet. A ‘V’ shape, where prices rise as sharply as they fell is unlikely. A ‘U’ shape where prices rise sharply after a pause for reflection is also unlikely. Then there is an ‘L’ shape where prices do not rise at all following the fall in prices. The potential for a second wave could, it is suggested, cause a ‘W’ shape. It is comforting to describe future movements in structures that we know, but I do not think that any letter of the alphabet is helpful here. It is my belief that the panicked fall in the investment markets which reached its base on 23rd March 2020 was followed by an immediate uptick when investors realized that they had gone too far. The future is likely to show an upwards trend, which will be subject to periods of negative movement on occasions. The upwards line will remain neither steep nor straight.

Those clients with cash on deposit also need to be careful. A number of German banks, reacting to negative interest rates from the central banks, are now charging or planning to charge their clients, penalty interest rates on cash deposits over a relatively small level. For clients with a longer-term view of their investments it does simply not make sense to keep large cash deposits. There is no need to invest in the higher risk equity markets, there are many other alternatives to consider.

Overall, we will undoubtedly see more volatility in the investment markets. I try to reduce the impact of this as much as possible, but in many cases, volatility will be double the levels of previous years.

My portfolios will remain strongly invested in equities. How strongly depends only on the risk propensity of my clients. In truth there is now no alternative to investing in equities. There should be more encouragement of monthly regular investments, as cost averaging helps to reduce the volatility in a portfolio.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the

Chartered Institute for Securities and Investment in London. (

Coronavirus or Covid-19 Investment update 25 March 2020

Coronavirus or Covid-19: It’s not (yet) over.

The wave of the coronavirus pandemic has left China and is now over Europe and heading for the US.

There are many influences for investors to be aware of.  Firstly the panic selling of anything that could be sold and this at virtually any price. Then there is the current oil price war between Saudi Arabia leading the OPEC countries and Russia. Finally we have the virus itself which is causing fear and consternation among the public and governments in every country in its path.
At long last, the developed worlds’ central banks and governments have reached agreement on the fiscal support mechanisms necessary to keep the world afloat and alive, if not actually vibrant. The last government to sign up to a package of sensible support measures was the United States. Even when the need for action was clear, there was an attempt to support politically friendly large companies and underplay the support for the poorer communities. This took a day or so to clear, but now the coast is clear for a major support package from Washington.

Many investors were forced to sell their holdings including gold, at the lowest prices because they had to meet their obligations. Many ETFs and automated trading systems, especially those with leveraged strategies have major losses which will still be announced. The extreme movements have also shown which fund managers have performed well in adverse circumstances and which stuttered and perhaps failed. This term is called ‘downside capture’ and recognizes the relative performance of a manager in falling markets. I will be adjusting my clients’ portfolios to reflect the lessons learned from this crisis.

The investment markets, especially the stock exchanges began their rebound in the expectation of such coordinated action, but the recovery is still weak and could be fragile. There is however still no roadmap except perhaps for the very long term. It is clear however that many institutional investors and funds must rebalance their portfolios at the end of the month and quarter and will be buying the equities of many different sectors.

The equity markets in Germany suffered surprisingly badly in the past month (yes, it was really just a month), this despite the fact that Germany has so many excellent engineering and electronics companies. Pertly this reflects the fact that the DAX 30 index only has 30 major companies in it. Partly also that short-term traders could not escape their trades in Equities and Indices quickly enough. When an on-line trading platform collapsed under the deluge of sell orders, many short-term investors had to accept major losses.

The future recovery will not show a friendly straight line. The first day of positive results on Tuesday 24th March reflected pent-up frustration that the investment markets had fallen too far. There will be setbacks on the journey to recovery and it is clear that there will be a short global recession based on the closing of many businesses during the battle against the virus.

It is interesting to note that the central bank measure have all but abolished interest rates potentially for a longer time. This will prove to be an aid for weaker economies and companies, but there will still be a number of bankruptcies as customers stay away and there are no reserves to cushion the blow.

The German economy will recover relatively quickly especially once their workforces return to productive work and their customers start buying again. Germany also had a disciplined budget which allowed swift financial support for the stuttering economy.

Italy by contrast has no reserves and no disciplined fiscal policies and has called for a major support package from the European community.

The United States of America built up no fiscal discipline and spent and borrowed very heavily during the rich years. The present fiscal measures going through congress and the senate will heavily increase the level of governmental debt. While this is the wrong time to explore fiscal conservatism, it will fall to the US treasury and the government as a whole to rein back excess spending when the crisis is past.

Economic recovery will depend upon heavy investment which will undoubtedly be rewarded when more stable markets have returned.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung.

He is a Fellow of the Chartered Institute for Securities and Investment in London.


Past performance is no guarantee for future profitability

John Townsend’s Investment Opinions January 2020

There is only one good, knowledge and one evil, ignorance. – Socrates

A very Happy New Year and a Happy New Decade to all.

There have been many changes in the past decade. Everyone has their own list of events, some good, and some bad. The one certainty is that the next 10 years will have many more changes and there is no certainty as to what these changes will be.

The investment markets are influenced on their returns by the acts of politicians. Some acts are obvious, such as those in the US at present, some are less clear, as in Germany, but will probably have a long lasting effect.

Cleon was an Athenian General who died in 422 BC. In his lifetime he earned a reputation amongst his peers for being a loudmouthed, unscrupulous and war-mongering demagogue. He accused his peers, especially Pericles of maladministration of public money, though the latter was able to clear his name. Cleon went on to dominate Athenian Politics, misusing the democracy that was applied there. He was rough and unpolished, but he knew how raise the emotions of the poor Athenians who in turn supported him in making false charges against his political opponents so as to remove them from power. He criticised the Athenian generals, but was himself a failure when it finally came to leading an Athenian army. The actions of Cleon led inevitably to the downfall of the Athenian Golden Age.

Although an aristocrat, he found it politic to break off all connections with his own noble background. His influence lay in a forceful and bullying style of politics and a tone which was both anti-intellectual and anti-aristocratic. In his treatise ‘History of the Peloponnesian war’ Thucydides described Cleon as being an opponent of peace because if tranquillity were ever to be restored, his crimes would be more open to detection and his slanders less credited.  Lessons can be learnt from history, even from 2,500 year ago.

Careful investing means having to look beyond the immediate and past movements in the markets. Whereas major US corporations and their shares have contributed too much of the profits in the past years, some could now be running out of steam.  Many companies in the US and in Europe have borrowed heavily while interest rates were (and are) low, in part to buy back their own shares, which in turn has helped to raise equity prices. This increased debt has also been used to cover inefficiencies. The problem is that much of this additional debt will come back to haunt the lenders when interest rates begin to rise again as one day they will and when companies fail as a result. A major change in the past decade has been that it is no longer the banks that lend to companies and foreign governments, it is the investment funds. When the crunch comes, the banks will have earned their fees as arrangers, but the funds will have carried the risk and will bear the brunt of any down turn. It is time to limit investment in fixed income products severely.

Investors have to be able to understand the risks their funds are taking. ETFs are the archetypal ‘fake’ investments. An ETF does not carry out an analysis, but instead follows a market blindly; when an index changes its composition, so will an ETF.  The difference between the selling price of the old asset and the purchasing price of the new one is then disguised in the undisclosed costs. In a strong and rising market, a lack of decision making analysis does not show. When an economy weakens, critical analysis becomes essential to understand the risks and avoid or at least mitigate them. An ETF invests using borrowed money attracted by the seeming lack of costs. Analysis and risk management costs money. Analysts mitigate losses; without such knowledge there is no understanding and therefore no protection against sudden market movements.

Investment sectors in the coming decade must include equity funds which earn dividends from the companies in which they invest. These companies have to pay dividends from earnings and not from increasing their debt. Only careful analysis will identify these.

There is an increasing market for sustainable investments. This market will continue to grow rapidly and the prices of shares from companies whose activities are clearly sustainable have risen and will continue to rise based on the demand for such assets. The bandwagon effect has of course taken hold and many fund management companies have labelled their funds as being sustainable, even when their assets are not. This is called ‘greenwashing’. There are inevitably many agencies which offer sustainability ratings. Some of these are credible, others, again, are not. The United Nations has issued a list of 17 Sustainable development goals which investors should adhere to when selecting their investments. Many of these goals are contradictory and professional fund managers have had to sub-divide these criteria into five broader groups to make conscientious investing possible.

Economic markets too have their problems. Investors have benefited greatly from the rise in demand for US and European equities, but the US economy seems to have reached a plateau which Europe has yet to arrive at. The warning signs are there and caution is called for. Third-world investments especially in Asia, including China, presently show a great deal of promise.

Japanese companies have quietly become profitable again. Japanese institutions are investing domestically and abroad and the stock markets, which have been at a low level for too long a time, have begun to rise, especially as alternatives to the US markets are being sought. The usual divisions between value and growth stocks are not particularly relevant here. Good companies are being supported by rising demand. Fund investors should concentrate on finding competent and experienced fund managers to access this market.

Chinese companies have been vilified because of the involvement of the Chinese state in many aspects of their activities. In truth, those companies which are big enough to warrant overseas investment do probably have governmental oversight, but many are inherently dynamic and profitable. There is an argument that larger companies even with state oversight, still have a spirit of entrepreneurship, yet are unlikely to suffer the economic volatility in times of adversity, particularly because of government support. The banks are another matter however. The Chinese government, having clamped down on excess lending from secondary banks, especially for investments outside China, is now encouraging local banks to support small and medium companies which could be suffering from concerns over the trade dispute with the USA.

There is presently an attempt at cooling the so-called trade war started by President Trump when playing to his red-neck US crowd. He might have had more success had he reined together the other global economic players, but teamwork has seemingly never been his strength. In the end, it is US farmers and industry that have suffered more than any Chinese sector. Many US companies are now terrified that the markets for their products (the biggest market for Apples iPhones is in China) will dry up. There will be a treaty of sorts and Mr Trump will claim the usual resounding victory in this, an election year. In reality the US has missed its target and has gained only scorn and increasing distrust from China as well as from traditional US allies and much of the rest of the industrialised world.

The investment markets will not continue their steep upward path in 2020 and beyond. There will be increasing volatility and investment portfolios will need to be adjusted to meet these challenges. This means that the proportion of equities in even the most dynamic portfolios will need to be reduced. Above all, portfolios will need to be diversified within investment sectors and between them. There can be no alternative to broad diversification. The hype over low cost ETFs should be ignored in favour of safer returns from the best performing managers with real analysis, high returns over their indices (Alpha) and a proven track record.

Past performance is no guarantee of future profitability.

John Townsend’s Investment Opinions July 2019

Truth is always strange, stranger than fiction. – Lord Byron

Tainted politics is taking an undue place in the financial Markets: President Trump’s one man and teamless US government (with the support of a very few loyal , ambitious, but not especially capable henchmen) and Boris Johnson’s directionless  accession to the prime minister’s position in the United Kingdom both carry the hallmarks of an incoherent, disruptive and anarchistic style. To this end both countries are at risk of descending into economic and political chaos with no clear direction and no ability to protect themselves in the event of a coherent threat, whether economic or political. Mr Johnson, who once failed at a career in Journalism largely for manufacturing stories, has been unflatteringly described by his past editors. He has, by all accounts, all the moral direction of a windsock.

The US President, a self-described dealmaker, is imposing tariffs on his own international allies with Europe and Japan in particular bearing the brunt of his newly imposed penalties. There is no logic to these tariffs, other than an attempt by Mr Trump to flex his muscles in the run up to the next US presidential election. The biggest danger of his actions is that the opposing countries could feel themselves forced to devalue their currencies. In any event, it seems that the United States is also planning to devalue the US Dollar to make US exports more competitive. This devaluation competition would be destructive to all western trade.

The threatened trade war with China started by the US president (because trade wars are apparently easy to win) seems to have had little effect on China. Here the annual growth rate has slipped from 6.5% to 6.2%, though this is probably as much due to internal changes made to their economic policy by the Chinese government than any effect the US tariffs are inflicting. The 6.2 % level is still within the limits set by the Chinese government of between 6.0% and 6.5 %. Here it should be noted that the US president seems to have misunderstood the cash flow from imposing tariffs, which is an additional cost to the US consumer not to the Chinese suppliers.

The US economy is buoyant at present and interest rates seem to be set for a decrease of 0.25% again after a similar sized increase in September of 2018. There are however economic clouds on the horizon which could cause weakness in the US economy.  With money being so inexpensive to borrow, there are many US companies expanding through investment, but equally there are also many which are keeping themselves afloat with heavy borrowing. This is potentially troubling for the high yield (and therefore higher risk) investment funds which seek extra performance by investing in non-investment grade companies. They will suffer badly when interest rates begin to rise once more and the US economy weakens. I have chosen to avoid these funds in my client portfolios.

Inflation rates both in the US and in the Eurozone are at very low levels, (1.8% and 1.3% respectively). Growth is equally low at around 1% per year. It is hard to see, given how much money is being made available at present, that inflation will rise appreciably or at all. Interest rates in Europe have also been structured to stay low, even after Mr Draghi leaves his role as the head of the European Central Bank.  Mrs Lagarde will have little freedom to raise Euro interest rates when she takes over. The EU does however now have two problem members, Italy and Poland, which could affect political stability. Both have vocal anti EU Political voices. Low interest rates will undoubtedly help Italy to stay afloat, without that country having to make any difficult internal economic adjustments. Poland, which is the EU’s biggest net recipient of cash, does not pay interest on their EU support and so will be less affected by any future rise in interest rates. In truth neither can afford to leave the shielding wings of Europe, but they can and do stir up unnecessary controversy with their demands which appeal to their local constituents.

The US president’s irrational decision to unilaterally cancel the Joint Comprehensive Plan of Action (JCPOA), a multilateral agreement to limit the production of Iranian nuclear material, was in truth intended as a cancellation of yet another measure signed by President Obama, who Trump loathes. Quite why former president Obama is disliked so intensely by Mr Trump is not clear, but the measures the former put in place have been cancelled wholescale without replacement.

Iran has an intractable problem in that it has different internal factions who compete for power and often do not talk to each other. There is the officially recognised government, with whom the foreign governments interact, but there is also the Iranian Revolutionary Guard Corps, with whom foreigners do not communicate, which is the spine of the current political structure and is a major player in the Iranian economy. The IRGC has taken its own violent steps against oil tankers in the Arabian Gulf and the kidnapping of a British vessel in international waters in revenge for the seizing of an Iranian vessel full of oil destined for Syria. The revolutionary guards are not under government control and western foreign ministers’ speaking sternly to their Iranian counterparties has very little effect. The other parties are mainly religious while having an effect the Iranian people, are not important in the international field. It would have been much wiser to have left the treaty untouched.

Saudi Arabia and its allies in the Gulf are the implacable enemies of the Iranians. This has much to do with the Sunni (Saudi et al) versus Shia (Iran and Northern Arab states) conflict within Islam. The Saudis have garnered the support of US president Trump and his son-in-law and feel themselves strong enough to take military and economic measures without regard to other international opinion. This has many of the hallmarks of the League of Nations between the two world wars.

There is however good news from the Emerging markets sector, especially in the Asian region, where good fund managers with capable analysts are now achieving good sustainable returns. In an ever more complex investment market, it is essential to use only those fund managers who have adequate corporate analysis teams  and can take decisions based on  ‘bottom up’ as well as ‘top down’ criteria. There are many excellent companies to be invested in. The big US and European companies are covered by several teams of analysts and cannot make a move without causing a reaction. Smaller, non-US and European, Companies have far fewer analysts watching them and therefore allow more room for valuable research results.

The Japanese economy is proceeding quietly along its own path. Western economic powers are lamenting the increased ‘Japanisation’ of their economies. The Japanese central bank however has been supporting its domestic economy with low interest rates and adequate financial liquidity for many years. This has included buying Japanese government debt and the equities of many big Japanese companies. The second biggest holder of Japanese government debt is the ubiquitous housewife Mrs. Watanabe, it is unlikely that these investors will ever wish to offload their investments and Japanese paper will therefore, despite being relatively unexciting, produce a steady return. While these measures have not led to a high growth rate, they have encouraged corporate profitability and Japanese companies are now healthy.

The Chinese growth rate has reduced slightly to 6.2%. But the Chinese government is working to change the direction of the economy, reduce domestic debt and he domestic dependence on loans from the unregulated banking sector. US tariffs are having only a limited effect, with most goods, such as agricultural commodities which the Chinese used to buy from the US and are now the subject of revenge tariffs, being bought from other countries. Foreign car companies however, especially those with factories in China and those selling cheaper models, are suffering badly with demand for their vehicles drying up. I suspect this is likely to be temporary as the economy gets used to the new government borrowing policies. Again the emphasis on investing in Chinese company risk is to have very highly trained and experienced analysts.

There are still major discussions relating to the difference between passive investments such as ETFs which actively follow a real or artificial index and Active investments such as managed funds. Passive funds theoretically have lower costs as they have no front end fees and no management fees, they do however have the costs of switching their investments when the indices change, though these costs are rarely if ever publicised. Actively managed funds, especially when carefully analysed and well managed, have the advantage of earning a positive margin over an index, known as Alpha. They are normally compared on a net basis after all fees and charges. A client orientated portfolio of actively managed funds is therefore likely to perform better than a portfolio of supermarket index funds. I am a firm believer in seeking out medium term ‘Alpha’ and combining uncorrelated strategies into portfolios with above average returns.

The key to successful and profitable investing in the fund markets is to plan ahead, to stay calm in financial storms and to use the best quality managers who deliver consistent Alpha and as far as possible do not all invest in the same stocks and strategies, thereby avoiding ‘bunching’ of risk.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.


John Townsend’s Investment Opinions 03 January 2019

“Wall Street indexes predicted nine of the last five recessions” – the late Nobel prize-winning economist Paul Samuelson

In the last three months of 2018 we experienced a major correction in the global Equity- and Debt markets. It is the nature of a panicked market, especially one fuelled by the actions of politicians of ill-will, that there will be severe overreactions. The end of 2018 saw such a panic, coupled with an avoidable trade war with China which the US is unlikely to profit from, an expected slowdown in Chinese growth from 6.6% to ‘only’ 6%, a British exit from the European Economic Community, for no good reason other than xenophobia and a vague, though possibly unfounded hope, that other non-European countries will step in to fill the inevitable trading void. This is leading to the slow suicide of a once proud economy and political system and its fall into relative obscurity.

All of the above, despite a global growth rate of some 3.7% in 2018, caused embattled traders, who were waiting mainly to square off their trading positions for Christmas and the New Year to seriously overreact. Something which will cause a rebound in 2019.

A year-end correction had been expected. The developed economies had experienced some 10 Years of growth and a deep breath was to be expected. Equally, the global economies are at a late stage in their economic cycles, though not yet at the end of them, based on the experiences of history. Market sentiment cannot be predicted and when an unadvised US president follows his ‘gut instincts’ based on reports on Fox news rather than the advice of his own staff, the gyrations caused by ill-considered twittered announcements produce only negative results.

Yet the US and Chinese economies are both strong and growing, there is no sign of recession there, perhaps yet. In the US, a major tax relief exercise helped to boost corporate profits for the time being, though this is unlikely to be repeated. President Trump is blaming the increase in US interest rates of 0.25% for any future weakness in growth. In China, the government has realised that a relaxation in the credit availability had helped growth in the past, but is in danger of going too far. A clampdown on loan availability from the private sector and secondary banks is taking place, which is leading to insecurity on the part of the manufacturing sector which is worrying about funding for future trade and investment. This too will find a new balance in 2019.

In Europe uncertainty is being caused not only by Brexit and where to find the billions that the UK has in the past paid to Europe to support various schemes and the ever needy southern ‘olive oil’ countries. Italy and France are beginning to show signs of economic slowdown too. The French government is trying to take counter measures but is being met with predictable violent demonstrations. In Italy, a new populist government does not even want to discuss financial rectitude and the Italian economy is likely to be a source of concern in the year ahead.

The emerging markets are dependent to a large extent on the demand for their goods from the developed world. They are working hard to build some interdependence, though a decline in the developed markets will undoubtedly cause a slowdown.

The global investment markets will recover from the current panic, as the senior traders resume their work at the beginning of the year. There will be a period of calm, but the threat of a recession is never far away and portfolios should be stabilised by additional diversity to counter the buffeting to come.

Germany has been the powerhouse of the European Investment markets for several years; however the German economy has been largely focussed on engineering and technology companies. These two sectors have been suffering badly as confidence has drained from the institutional investors. The diesel scandal affecting many if not most of the car manufacturers and their declining support they are receiving from the local politicians causes concern about profitability, although not their actual survival. Technology stocks have been hit because of the general concern about this sector on a global sector. Let us be clear; there is a very good future to be seen in both the German engineering and technology sectors  and investors would do well to sit on their hands here too until the malaise has passed.

Funds following mixed strategies have traditionally been a safe haven to reduce risk, yet it is this mixed strategy sector which has also taken an unexpected beating in the past crisis. 2019 should see a reduction in the proportion of a portfolio which is allocated to equities. However, past academic studies have shown that there are only some eight to ten days in an average year which offer strong growth to investors.  If these days are missed, a portfolio will have minimal, though positive returns. In the same average year there are normally only some five or six days which suffer heavier losses. No one can say in advance which the profitable or losing days are. The message is that investors have to remain invested and to be patient.

Investing in cash is also not advisable in the long term. Inflation rates are rising and an investment needs to earn more than the rate of inflation, currently 1.8% in Germany in order for investors and savers to retain the spending power of their money.

The final economic recession before the start of the next cycle is now probably due in 2020, having been pushed back by the turmoil created by the present market upheaval. The timing is impossible to predict, as the event has been widely discussed, possibly resulting in a move in anticipation of the reality. The very few ‘experts’ who predicted the major crash of 2007/9 are also making their predictions, though these should be discounted to some extent by the fact that so many experts are judged on the one  event they possibly foresaw and not by the ones they did not.

The sectors to follow in 2019 include those where sentiment has swung against them in 2018. These are Germany, China, Japan and technology. The US equity markets are overvalued due mainly to the fact that they are supported by major local financial institutions. This gives them inadequate value for money and buffering when it comes to a down turn.

Emerging markets depend on efficient companies selling to strong economies as long as the Chinese, European and US markets continue to prosper, they will also offer adequate returns. The New Frontier Markets, those where countries are too economically small to count even as emerging markets, can produce windfall returns, but in a volatile environment the risks and the liquidity of their investments make them increasingly dangerous.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.



Investment Opinions 21 September 2018

“Whereof one cannot speak, thereof one must be silent”            Ludwig Wittgenstein.

Much is being made of the insults and slights which the American president is meting out and receiving. Most of these are relevant only because they affect the atmosphere behind the global equity and fixed income markets and these markets are subject to the sentiment of investors rather than facts.

The trade war with China instigated by Mr Trump, who opined that trade wars are easy to win, will hurt mainly the US consumer and US exporters, the Chinese having deliberately targeted the economic areas which are principally Republican strongholds. On the Chinese side, there is likely to be a decline in economic growth; quite how much is difficult to say as the figures are decided in advance by the central authorities and subsequently made to fit. Equally, Chinese economic growth is currently strong and the effect of a few tenths of one percent will be minimal.

China is also pressing on with its trade growth under the belt and road plan, which effectively will cover the world outside the USA. US economic sanctions, especially those imposed with emotion and lack of clarity will cause discomfort, but are unlikely to result in major problems.

Trade between China and the US will simply cost more for the US consumer as there are so many components in every day goods that stem from China. US inflation will rise, but from a low base; the consumer will however notice, which will have political implications.

Bigger problems are arising in the Emerging and Frontier markets, where macroeconomic (governmental level looking down) issues are disguising the fact that there are excellent companies in the third world. Specialist investors and fund managers identify these companies and invest in them even though market sentiment causes unhappiness and falling prices. The market relies on positive global attitudes and still needs to recover from an American president who has destructive tendencies but little understanding of the impact that his publicity seeking actions on the election hustings have outside his immediate horizons.

Interest rates are rising to more normal (i.e. pre financial crisis levels) in the United States. This is causing inflation there to rise too, although again to more normal levels. An inflation rate of around 2% is actually healthy. US companies are profitable and US unemployment is presently low, though the statistics belie the fact that many previously unemployed workers now have crushingly poorly paid work, which can be seen by the low level of wage inflation. The time to invest in US companies is still there, but the market is likely to become overheated as the hot money invested by the so called 16 year old inexperienced traders who follow panic rather lead markets becomes scared of higher volatility.

The European markets are now moving some three to four years behind the United States. While quantitative easing is being run down, interest rates cannot be allowed to rise, because the Italians and Greeks especially simply cannot afford to pay more for the debt they are still incurring.

My recommendation is to focus on investing in Northern European and Japanese markets and only with experienced managers who have a proven track record. There are opportunities in China and Emerging Market companies too, though volatility will always be a problem here.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.