There can be no doubt that vaccinations in the UK appear to be working. COVID cases are on the drop, hospitalisations have not dramatically risen, and most importantly, neither have deaths. The recovery though remains delicate. There was a phrase that was used quite early in the Pandemic; that the virus is “playing a game of cat and mouse with us, and we are not the cat”! This still seems to be the case.
The shape of the economic recovery is causing some discussion amongst the investor fraternity. Commentators remain obsessed with inflation. Barely a day passes without forecasts of lasting or transitory inflation and speculation over when interest rates are set to rise. Treasury yields spiked to nearly 1.8% in February, which immediately triggered forecasts that they would go above 2%. A few months later, yields are down at 1.3%. We really do wonder if interest rates will ever “normalise” – after all, what is the new normal? If, after 13 years since the Great Financial Crisis of 2008, rates have not returned to pre-crisis levels, maybe they just never will. It is difficult to see how rates can rise with any significance without severely disrupting the global real estate market which dwarfs the global equity markets in value, and a crash in one sector probably equals a crash in the other. Such a crash would precipitate a dash to safety, most likely in the form of a dash to Treasuries and further downward pressure in yields. And so it goes on.
Long term themes are key to investing. Technology did have a difficult start to 2021 as an overall sector as rising yields put pressure on future earnings, but once more technology has come back strongly in the last few months. In 2000, Microsoft was the 7th largest stock in the S&P 500 and today sits 2nd. Not one other of the top ten constituents in 2000 remains in 2021. The point being, to be a successful investor it pays to remain flexible, prepare to adapt to the conditions of the time, and invest in what the world wants and needs as opposed to what it has wanted and needed in the past. Twenty years ago, a well-known former fund manager was a strong advocate of holding tobacco stocks for the long term. Others saw the future inevitably including major oil and gas companies and High Street banks. After all, we’d always need those, wouldn’t we? The answer in 2000 was, of course, we would. 21 years later, with a Financial Crisis and a Pandemic behind us, the world is shaping up to behave a little differently. It is fascinating to wonder which companies will be in the Top 10 of the S&P 500 in 2042 that we have not heard of yet, but they are what our investment team are trying to find today. It is of course devilishly hard to find exactly the right stock, however we know the pools in which we want to fish. Twenty years ago, we knew the internet was a thing, but we did not know the astonishing array of “add ons” that it would throw up. Artificial Intelligence and Robotics were found in science fiction films while State-sponsored cyberattacks were more like James Bond than real life, yet they offer us wonderful investment opportunities today.
Not having to go to the shops and having everything delivered to your door was just a pipedream twenty years ago, while driverless cars were beyond fanciful. This has now changed and we can look through the current market volatility with great optimism about what the future holds for a calm and patient investor. Have a lovely weekend.
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