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 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 December 2017

Those are my principles, and if you don’t like them… well, I have others.  Groucho Marx

President Trump has finally passed the first important measure so far of his presidency, the tax reform bill. Inevitably in his world of superlatives this is the biggest and best tax cut ever. In reality it isn’t, there have been other larger ones, but it no longer makes a difference. This particular tax cut, being undertaken with borrowed money is dangerous and shows absolutely no understanding of economic reality by a president or by the sycophants surrounding him.  The new measure is said to be a Christmas present for all Americans; perhaps more appropriately there should be an addendum in parentheses, Americans like Mr. Trump. Sadly most middle income Americans have no idea whether or not they will be better off in 2018, as the cuts to their tax deductions are desperately unclear. Mr. Trump’s other achievements to date have been to roll back anything with the name of Obama on it, whether or not it was beneficial to the citizens of the United States. We must constantly remind ourselves that he is the legally elected president of the country and until this changes, this is the price that must be paid for democracy. American influence on the global economic and diplomatic stage has declined sharply.

For investors, 2017 has been a profitable year, though with little rationality and very high volatility. The low, indeed near zero, interest rates in the United States of America and Europe have encouraged corporations to borrow to finance their operations and any kind of return on their investments. Such demand is leading to the acceptance by investors of much lower quality than in the past, which is leading to a series of irrational bubbles, particularly with junk or high yield bonds. Perhaps the most obvious bubble investment is Bitcoin, which has risen in price from US$ 1,000 in January to around US$ 19,000 in November and now US$11,000 today. This massive increase in the price of a Bitcoin is odd as it is a completely unregulated market with nothing behind it and no governing body to oversee abuse. One has to think of the London South Sea Bubble or the Amsterdam Tulip and bulb craze. The original concept of Bitcoin was as an alternative currency, but this has been lost in the panic. The main Bitcoin producers (known as miners) are in Russia and the Ukraine. Bitcoin mining is an expensive and highly technical system and despite many best efforts, uncontrolled. There is now a new futures market for Bitcoins in the US, which in the past has normally been a prelude for a disaster in the market. Investors may congratulate themselves now on the high price of their units, but when the market declines they will find no buyers for their Bitcoins and their investment will swiftly become valueless. Those whose memories are long enough will recall the dotcom era. The only advice is to stay away unless one really wants to gamble on markets more risky than even the Chinese horse races.

Other strange sectors are ETFs. I have written about these before. The market for exchange traded funds began to allow corporate investors to increase or sell equity investments quickly when they wanted to. Since then the market has exploded and even retail investors have been dragged into products which they don’t and cannot understand and where they have vaguely heard there are few costs. In fact ETFs lag behind the markets they are supposed to follow and because their investments are effectively blind, they have neither corporate analysis or governance to rely on, nor the distribution of risk by an experienced manager. This market, while not as bad as Bitcoin, is still a recipe for disaster for the private investor without adequate advice.

We can see the bubble investments in the technology sector. Companies such as Tesla may make very interesting products, but at a cost much higher than the price they can sell their cars for. They have just announced another record loss and admitted that production is way behind schedule. This is still a good company compared with some being enthusiastically supported by the market place. There are indeed good and profitable technology companies in the FANG (Facebook, Amazon, Netflix and Google) sector, but there is also an awful lot of dross which promises to go sour when the excitement dies down.

Global interest rates have fallen as low as they are likely to. The end of Quantitative Easing is being seen in the United States and in Europe.  US interest rates have begun to rise slightly and Quantitative Easing is being cut back slowly, but American corporate profitability and efficiency is such that equity prices should not be affected. In Europe however, the head of the European Central Bank Mr. Draghi has a problem. He knows that the QE program needs to be cut back to reduce the Central Bank’s balance sheet and that interest rates have to begin to rise. However, as a good Italian, Mr. Draghi also knows that the inefficient Italian economy and banks coupled with the massive Italian national debt, cannot afford higher interest rates. So these have to be held back as much as possible. However, there is very little chance of Italy becoming more efficient or disciplined and repaying its debts, so the next crisis is destined to come in the near future.

The rise in the equity markets is largely based on the fact that most of these different markets declined sharply 10 years ago. Most of the efficient companies remained profitable and the present artificially low interest rates leave investors desperate for positive returns.

The American equity markets are presently strong, having undertaken the necessary measures to improve their efficiency. The Trump tax easing measures have helped, of course, but these were largely discounted.  The US technology sector is flourishing and housebuilding has renewed confidence relying on wage growth in all sectors from the lower to the higher incomes. Coupled with that, American equities have always traded at a premium to equities elsewhere in the world; their present levels should not be seen as being excessive especially as many US pension funds and institutions only invest in their domestic markets.

Europe is also booming, especially Northern Europe. Here the Goldilocks environment where everything is felt to be ‘just right’ exists at present and many companies are showing profitability and growth. The economies of France and Spain are also showing signs of strength, though South Eastern Europe is still heavily dependent on the largesse coming from its more northern neighbours.  As long as investors rely on fund managers who have the ability to select profitable companies from the Northern European states, Europe is still a sound investment.

A decade of stimulus has helped the Asian markets to finally regain enthusiasm but has also stoked speculative fervour. Japan has now begun to find new confidence in both the blue chip and the small company sectors, with foreign investors having been reluctant to step in. This has now changed, especially as just these foreign investors need to find a profit from the money under their control. The Japanese market is showing a great deal of promise.  India too is gaining ground as a source of profitable investment. Of the original BRIC countries (Brazil, Russia, India and China) India and China are showing most promise, though perhaps India more so than China at present. The other two, riddled as they are with corruption and failing corporate governance are well worth avoiding.

Some property markets are still more or less booming, Australian house prices have been fuelled by very low interest rates, with Sydney’s house prices having risen almost 70 percent and Melbourne’s 57 percent over the past five years. This has all the hallmarks of a bubble which will burst at the latest when interest rates begin to rise and demand from Chinese investors falls away. Much the same is true of property markets in Hong Kong with residential prices having risen over 180 percent since 2008. The Chinese central bank is clamping down on excessive lending by secondary tier banks and the ability of normal Chinese investors to compete in the monopoly world of Hong Kong is being severely reduced, something that will only be exacerbated as US Dollar interest rates rise again.

The almost desperate struggle to find a return on investments has meant that many banks, institutions and funds have begun to lower their risk thresholds and invest in debt from companies and countries they would otherwise never have considered. Ample liquidity has to be used, is the feeling not only by the traditional markets but also by the Chinese financial sector. Prudential lending and probably prudential reserve positions are being ignored, and once again investors need to observe fund managers carefully to see which are following careful strategies and which are merely seeking yield at the expense of quality. It is worth mentioning that the growth in high yield bonds, known in the 1980s as junk bonds is likely to be one of the first victims of a new realism.

The market for multi-asset investments has begun to prove itself, especially when equity volatility and thereby perceived risk has grown. Rising inflation and interest rates, albeit only slowly increasing, make it necessary for investors to seek new sources of diversifications. Funds that invest in Equities but also fixed and floating rate debt, commodities and currencies all have their place in this category, as long as the fund managers have shown their track record of being able to handle such strategies. Some, especially the black-box trend following programs have sadly completely failed; which is precisely why careful analysis and due diligence in reviewing fund managers is so essential.

In 2018 we will see tax changes in Germany, which have a small impact on private investors but which, together with the new MIFID II regulations will increase the amount and clarity of information that has to be supplied by intermediaries and Fund managers. This is nothing to be alarmed about and will hopefully ease the dangers of the miss-selling of inappropriate investments. The days of miss-selling to the ‘A&D’ (alt und doof) clients by the German banks in particular will be thankfully numbered.

There is still strong life in the global equity markets, as long as investments are carried out carefully and with due care and analysis. These markets will become increasingly volatile as institutions become nervous. One cannot discount a sudden nuclear or intense war between, for instance the USA and North Korea which would stir financial disharmony among the inexperienced ‘16 year old institutional traders’ who have no experience, but crises in Bitcoin, Block chain and the Technology stocks are unlikely to prove a ‘Black Swan’ moment and trigger total panic as in 2007/8. It pays to be wary and careful.

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 2017

Henry Ford was right. A prosperous economy requires that workers be able to buy the products that they produce. This is as true in a global economy as a national one. – John Sweeney

Despite all the happenings in the political world, now is actually an excellent time to invest in equities. The financial crises happened 10 years ago and companies are once again running profitably and investing. International and domestic trade has picked up again and there is no point – at all – in investing in the fixed income markets or keeping money with the banks where the returns are negative. Investment in real estate for letting, which is in or near big cities has become wildly over-priced, is incredibly inflexible and is no longer a profitable alternative.

It is the loudest trumpet that most often has the least meaning. The United States of America under President Trump is fast losing its credibility as a world power. The Russians, Chinese and Saudi Arabians, having learned that flattery was extraordinarily productive in gaining the friendship and attention of Mr. Trump, soon realized that the benefits of such flattery had only a short life span.  Mr. Trump seems be growing old disgracefully; one can use the analogies of the Queen of Hearts in Alice in Wonderland (off with his head) or the Emperor’s new clothes by Hans Christian Anderson, where the courtiers are too afraid to say that the emperor is, in fact, naked. Then there is Shakespeare’s play the tragedy of Julius Caesar where a dominant and arrogant Caesar is murdered by his courtiers. Each work has its parallels in the court of Donald Trump. The effect on the outside world is however minimal.

Mr. Trump’s announcement that the United States of America is to walk away from the Paris climate accord has much to do with the fact that this agreement was negotiated and signed by former President Obama.  It makes absolutely no economic or social sense at all to leave the accord and merely leaves the way open for other countries to fill the economic and leadership void left by the US departure.

The US president was elected on a populist ticket. The result is, disappointingly, anything other than populist; the actions suggested so far are those that will exclusively benefit the American elite. The next big question is how the midterm elections will affect support for or pressure against this president and whether US politicians will take the chance and insist on a change at the top before then.

Within the presidential medieval court in Washington, there seems to be chaos with policies being announced off the cuff by the president using Twitter, even if this directly contradicts the statements and efforts of his ministers. Many of the administration’s more senior positions remain unfilled and stories about fits of rage and tantrums in the corridors of power abound. Policy is not being made in the White House; it is up to individual members of the Senate to guess the right moment to present their measures to the president or his coterie of close advisors. In the end however, little or nothing is being accomplished.

President Trump has yet to have a single success story in his tenure so far. His aim seems to lie principally in trying to remove the measures passed by his predecessor, President Obama. In order to do so however, there has to be a willingness on the part if the entire Republican Party to support him, but this is simply not there. Overseas, the high point seems to have been the awarding of a big shiny gold medallion from the Saudi King to Donald Trump upon his arrival in Saudi Arabia. This was followed by the signing of an agreement in principle for a 110 Billion Dollar 10 year arms deal, which is at present being held up by the Senate Foreign Relations Committee’s refusal to give permission.

At the end of the day what actually matters to investors is the fact that the US economy is performing well and that US companies are profitable. It has taken about 10 years for industry and the banking sector to recover from the market panic of 2007 to 2009.

The defeat of so-called Islamic State or Da’ish in Syria and Iraq has little economic consequence, but is more emotive. A caliphate, or territory under an Islamic steward, was declared in Mosul by Abu Bakr al-Baghdadi, the nom de guerre of Ibrahim Awad Ibrahim al-Badri, with himself as caliph in 2013.  Before its final defeat, Al-Baghdadi ordered members of Da’ish to form their own one, two or three person caliphates wherever they happened to be in the world. These have been ordered to destroy society wherever they find themselves. The weapons to be used are anything that comes to hand, with vehicles, bombs and knives being specifically mentioned. Very few young men and women will finally heed the call, but some have and still will and there will be enough for the security forces to worry about particular targets; otherwise the main aim is to destabilize western society.

The myth of Arab brotherhood in the Gulf Area is becoming apparent in Qatar, where the country is being isolated and pressured by its conservative Sunni neighbours led by Saudi Arabia. The aim is to force Qatar to cut communication with Shi’ite Iran and to curtail the freedom of the more or less independent press. The Saudis have been emboldened by the support they believe has been promised them from the US president supported by his son-in-law Jared Kushner, however short lasting this may be.

In Europe the economic picture is also looking positive. Despite Brexit, many European and British companies are showing increased profitability are expanding and are paying dividends, all the better to meet the investors’ demand for risk assets offering a positive yield. Economic growth has returned, albeit in parts in Germany and is expected to appear in France under the new President Macron. Corporate efficiency is improving with costs being kept under control. At the opposite extreme, in Italy and Greece, the upward pressure on wage costs reinforces their uncompetitive position. The Italian and Spanish banking systems are also in a very weak state. This conundrum can only be solved by a two tier European Economy with two separate currencies. Uncertainty also arises from the forthcoming Italian election where a populist and anti-European party is gaining strength and must be reckoned with.

In the United Kingdom, a needless and incredibly badly handled snap general election has left the present ruling conservative party with a minority government, supported at present by a small Northern Irish party. The present prime minister Mrs. May has run out of her own feet to shoot into and is unlikely to last much beyond the autumn party conference where she will be expected to ‘do the right thing’.  Not only that, the present government is filled with characters more often found in a kindergarten. On the other hand, to allow the left wing Labour Party leader to run the country with populous messages that make absolutely no economic sense and seem to be dependent on spending money which does not exist would be a disaster. Mrs. May with an astonishing lack of skill has plunged the country into chaos just at a time when it needs to focus on negotiating even a halfhearted exit from the EU.

The conservative British government must now be seen to be supporting British Industry and the financial sector, something it had ignored in its political machinations. The British economy is still surprisingly strong, though there is cause for concern with a government that is woefully weak.

China is seeing subtle but important changes. The Chinese central bank is clamping down on the export of capital for foreign investment, while also putting pressure on the domestic secondary finance markets. The Chinese expected growth in GDP is expected to be between 6.5 and 6.7% in the present year.

There are two important developments in Chinese policy; the first is the Belt and Road initiative, a development strategy proposed in 2013 by the Chinese president Xi Jinping. The Silk Road Economic Belt and the Maritime Silk Road focus on the economic links between Europe and Asia as well the ocean-going supply routes which will provide China with a source of necessary imports. ‘Belt and Road’ is a long term project and is made possible by the Chinese tradition of long-term leadership.

The infrastructure initiative covers mainly Asia and Europe, but also includes Australasia and East Africa; it will include investments of up to 8 Trillion US Dollars and will ensure that China has the necessary import of raw materials for its industry and the necessary transport means to export its industrial production. Politics aside, there will be a significant future for Chinese industries.

The economic crisis of 2007 – 2009 has passed, the global economy has recovered and companies are thriving for the right reasons. At the same time there is no sense at all in investing in Government Bonds or putting money in the banks, which pay negative or very low interest rates, are themselves not customer friendly and are in need of reform. The only real alternative for private investors is to invest in very carefully chosen equities, using fund managers with a proven track record of managing risk and diversifying markets as widely as makes sense.


Past performance is no guarantee of future profitability.