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. (