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. (