Please find below our Investment Market Update as at 14th August 2020.
Blue Sky Investment Market Update
Finding the natural buoyancy
One thing is for sure, we’re not operating in anything like a predictable environment. Yet, just when we think it’s all very different this time, we see investment market conditions find their natural buoyancy. “You may throw the cork, harder and deeper into the body of water but eventually it will find its natural equilibrium”.
Gold has performed ever so well this summer as uncertainty reigned about the global economic landscape. It is often deemed to be a safe haven and its performance this year has supported this. Gold is priced in dollars and when the dollar weakens then gold tends to attract capital. However, this week’s movement in the gold price cast doubt once again over its ‘safe haven’ status.
The gold rally stopped in its tracks this week as bond yields rose in the US. This led to gold having its biggest one day fall for 7 years. As reported in Bloomberg, whilst a host of catalysts including geopolitical tension and the threats of Covid are expected to continue to underpin demand, the metal may take time to regain momentum with investors spooked by the rout, according to Commerzbank AG.
“The impressive summer rally enjoyed by gold and silver came to an explosive end yesterday,” Commerzbank analyst Carsten Fritsch said in a note. “We are unlikely to see prices return quickly to the highs they achieved at the end of last week. Yesterday’s sell-off caused too much technical damage for this to happen, frightening investors off in the process.”
Has gold found its natural buoyancy? Well, much depends on what happens in the US with the dollar, yields, stimulus, Covid, Presidential elections etc. This week’s correction is just a reminder that if an asset rises quickly, the correction can be more extreme.
Is a broader based rally underway?
In the US this week, we saw a broader based rally as opposed to gains being led just by technology stocks. This is exactly what is required if positive market moves are to be sustained. Alas, the euphoria around anticipated stimulus faltered as talks in Washington dampened enthusiasm. However, there is no doubt there is some positive momentum due to anticipated fiscal policy supporting the economy through difficult times.
Global equity markets are also taking comfort that, despite headline grabbing news, economic data is showing resilience at a time when outbreaks of the virus are shutting down geographical areas. The response to these outbreaks however still allows supply chains to repair themselves but to also reinvent their offering in a more efficient manner.
Klaus Baader, global chief economist at Société Générale, was quoted in the FT saying “the contraction in GDP has been quite a bit smaller than many had expected or feared.” He added that the global economic recovery was on course to record a “truncated V-shaped”.
L&G Investment Management had been wary over the near term market risks but this week reported that they have removed their tactically defensive positions around US Treasuries and equities. New virus cases have slowed making further shutdowns less likely in the US in the near term.
Too much too soon?
Technical charts used by analysts last week pointed towards support levels for US stocks, but of course there are always counter arguments and if the charts were the sole determinant of what’s going to happen in the markets, it would be quite easy to predict. There is no doubt however that such charts do have an influence on institutional investor behaviour.
The so called “Buffet indicator” refers to the legendary Warren Buffet’s simple measure of total market capitalisation of all US stocks relative to the country’s GDP. When it’s in the 70-80% range, it’s time to buy but when it moves above 100% risk, then it’s the time to be cautious. This is where we are now. However, a word of caution, Buffet is sat on huge cash reserves and of late, has been highly criticised for his lack of activity and buying stocks when they were cheap during lockdown.
We also have to bear in mind that the downturn/recession hasn’t been economically led, it was created by governments trying to protect the health of their respective populations. Now they are trying to stimulate economic growth. It may be that the economic data catches up with the price of equities which may serve to weaken the ratio and lower concerns.
What can we rely upon?
Sustainable investing is here to stay. I thought you might like to hear about recent activity in this space:
‘Groundbreaking’: Landsec plots net zero office building in UK
Landsec is planning what it claims will be the UK’s first net zero (meaning the carbon output is negated by the withdrawal of carbon) commercial development in London. The company claims the 139,000 square foot office building in Southwark, dubbed The Forge, will be the first in the world to be both constructed and operated using the UK Green Building Council’s (UKGBC’s) net zero buildings framework. This ties in nicely with our recent switch into Sustainable real estate within our Sapphire portfolio.
How to mix old tyres and building rubble to make sustainable roads
Construction, renovation and demolition account for about half the waste produced annually worldwide, while around one billion scrap tyres are generated globally each year. The new material, developed by researchers at RMIT University in Melbourne, Australia, is the first to combine recycled rubble and rubber in a mix that is precisely optimised to meet road engineering safety standards. Designed to be used for base layers, the recycled blend is more flexible than standard materials, making roads less prone to cracking.
Can we harness the extraordinary power of rivers in a way that replenishes ecosystems, rather than being harmful to wildlife?
The world’s most relied-upon renewable energy source isn’t wind or sunlight, but water. Last year, the world’s hydropower capacity reached a record 1,308 gigawatts. Utilities throughout the globe rely upon hydropower to generate electricity because it is cheap, easily stored and dispatched, and produced with no fuel combustion, meaning it won’t release carbon dioxide or pollutants the way power plants burning fossil fuels such as coal or natural gas do. As with other energy sources, however, hydropower is not without an environmental cost. Beyond the profound ecosystem impact of damming and diverting huge waterways, hydropower can wreak havoc on native aquatic species and their ecosystems. Therefore, the California-based company Natel Energy has partnered with Microsoft founder Bill Gates’ investment firm Breakthrough Energy Ventures to create a new, blunt-edged turbine that improves fish survival.
‘Once-in-a-lifetime’ opportunity for more sustainable food
An independent review of UK food policy is calling for “a gold standard level of scrutiny” to ensure new trade deals do not undermine the environment. Verification schemes should address concerns such as imports of beef reared on land recently cleared of rainforest, and the government should press on with plans to pay English farmers to improve the countryside. The report aims to ensure a food system that is healthy, affordable, sustainable, resilient and productive. The 110-page report calls for the adoption of a statutory duty that would give Parliament the opportunity to properly scrutinise any new trade deals, and it urges the government to press on with its Environmental Land Management Scheme. This would pay English farmers £2.4bn a year to improve the countryside, such as by capturing carbon or increasing biodiversity.
Have a good weekend and hopefully you can finally get some sleep with it being a tad cooler.
Best wishes
Gary and the Investment Team
RISK WARNING
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.