As March entered its second week, the rumour in London was that private investors were buying funds and company shares on the dips, but that most institutions weren’t. That’s a hopeless generalisation, of course, because it’s generally hard to tell which is which. But if it’s true, then it underlines the three most fundamental axioms of the IFA market: ride the downturns, don’t try to time the market, and be prepared to leave the decisions to people who are paid to know what’s going on, because they’re better at it than you.
The second of those injunctions, about market timing, is by far the most touchy of the three, because anybody who’s read the papers or consulted the online investment forums will believe he’s got the inside track on why this is the time to buy or sell. Very few people genuinely have that ability, or the self-discipline to act on it: the rest of those investors who make money are simply lucky. (Yes, I’ve been lucky….)
But the horrific 8% jolt to the Footsie on 9th March (and the accompanying 7% drop on Wall Street) were enough to knock the grins off the dip-buyers’ faces. It transpired that the worst of the shock was down to falling oil prices, which we’ll look at in a moment, and not to coronavirus issues at all. But if it encourages clients to be a little more cautious and to stick with what their advisers tell them, then that’ll perhaps be a good thing.
One person who says we should buy the dip is President Trump, whose Economic Council head Larry Kudlow told US investors to do exactly that in late February – just before the market dropped by another 13%. Some day, Mr Trump will claim the credit for having pointed us toward a massve gain, but it doesn’t look like happening any time soon.
What has happened here is that the markets no longer expect the second-quarter bounce-back that they were forecasting in February. For China, where coronavirus infections were stabilising, second-quarter economic growth was being estimated at 3.5%, down from 6.0% in final-quarter 2019. But for the rest of the world, the spread of infection was creating enough uncertainty to drag that optimism into a global counterbalance. This isn’t going to be a quick recovery – which is why the perception of an extended U-turn is looking more likely.
Stick to fixed interest?
I’ve been mistrustful of the “overpriced” bond markets ever since the late 2000 decade, when they were a lot less overpriced than they are now. To that extent, I’ve missed out on ten years of spectacular capital growth, which serves me right for being such a smart alec.
But currently, with the Treasury bond yield falling from 3.1% in late 2018 to just 0.42% in March 2020, and with some UK seven-year paper falling below zero, it’s clear that this is a very nervy and unattractive scenario. It’s also a source of worry for UK pension providers, given that even a 15 year gilt was delivering only 0.66% in late February. What price a defined benefit package now? That’s a question that will be weighing heavily on employers’ minds.
What happens next? Nobody can really tell, but it’ll be hard to make much of a return with rates like these. Any upturn in inflation (which seems quite likely) would leave many investors underwater. Hmmmm….
Crypto-currencies?
It’s funny, a couple of years ago we wouldn’t even have been asking this question. And we still can’t really find a place for cryptos in any proper portfolio, because it is after all speculating and not investing – it produces nothing, and it has no fundamentals apart from the number of people who want to buy it at any time. Yet we might have expected that cryptos would be whooping it up with the gold bugs (up by 15% since January). And they’re not.
Rather unexpectedly, this unbreakable, hugely liquid international currency (excuse me while I giggle) has fallen by 25% in dollar terms since mid-February – not because it’s in lockstep with equities, but because there have been rather a lot of scammers milking the unwary. Chinese scammers, mostly. (Make your own jokes.) You’d have been better off sticking to bullion, which had gained 15% in the three months to mid-March. Funny, that.
Commodities?
Let’s get this over with quickly. Yes, my BHP mining shares have taken a pasting, dropping by 30% in the four weeks to mid-March as the shrinking markets for Australian sales to China coincided with a proper rumpus in the oil markets, where the company is also active.
If you haven’t noticed the cheap petrol at your local service station recently, it reflects a 30% drop in crude oil prices – much of it happening in the first week of March. The driver for that wasn’t China, but an insistence by Saudi Arabia that it was going to open the taps and pump much more oil – much to the discomfiture of a furious Russia, which would rather that Riyadh had played its traditional role as “stabiliser” and kept its production down when prices were low.
Instead of which, they went lower, and lower, and lower. Some say that’s because Mohammed bin Salman, the country’s effective ruler, is exerting his personal authority over his minions. Others say that the Saudi government is getting strapped for cash these days, and that it can’t afford to hold back on an important revenue stream.
But I’ll tell you one thing. They’re not making oil any more, and despite the advance of expensive alternative technologies, it still has many years of dominance left. By the second week of March the Brent price had plummeted to just $37 a barrel, from $70 in early January. And with Goldman Sachs forecasting further severe pressure as the dispute develops, the sector seems unduly cheap at present.
Not that I’d encourage you to market-time, obviously…..
