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Positioning your portfolio for the risks and opportunities ahead

Source: International Adviser Publication

Four themes driving investment markets over the next 12 months: recession, low oil prices and yields, stimulus, recovery, and active edge.

For each of these themes, there are seen as three key investment ideas. The coronavirus outbreak prompted the fastest-ever bear market as the MSCI All Country World Index plummeted 33.6% from February 20 until March 23. Then, after stimulus was announced, the index rallied 27.8% to the end of April despite deteriorating economic data.. Investors now face some difficult questions. Is the recent stock market recovery sustainable, or is it merely a bear-market rally? Which investments are the likely winners and losers as the global economy recovers? And how should portfolios be positioned given there is so much uncertainty about the future? Our themes are based on how we believe the global economy will perform over time and the investment implications arising from that. For each theme, we offer three investment ideas. 1. Recession The global economy is expected to severely contract in the first half of 2020 at a magnitude not seen since the Great Depression in the 1930s, then either sharply expand in the second half of the year or recover more gradually into 2021. It is challenging to make money in recessions. Although money‑printing quantitative easing could be inflationary, inflation is unlikely to rise in the short term, not only because of the recession, but also because secular forces including low energy prices, demographics, and technology keep it low. Central banks have been struggling to lift inflation to meet their targets. Investment Theme No. 1: Recession

Some sectors are likely to continue to be winners. If the recovery stalls and lockdowns and social distancing remain in place for a longer period, technology may benefit, allowing for remote connectivity, online shopping, and cloud computing. This is on top of ongoing technology‑led disruption, where investors should be on the side of the disruptors, not the disrupted. If the coronavirus makes a comeback after the summer before a vaccine is developed, health care will remain critical.2.

2. Low Oil Prices and Yields

Overshadowed by the coronavirus crisis, the other drama in 2020 has been the fall in the price of oil. The challenge with oil is not just the fall in demand—when was the last time you filled your car with fuel?—but also oversupply. A low price of oil typically means low inflation.

Bond yields are low and are likely to remain so for the next 12 months. Low yields make it harder for banks to make a profit. Growth stocks in the U.S. may continue to outperform value stocks because 40% of the Russell 1000 Growth Index is technology while 20% of the Russell 1000 Value Index is financials and 5% is energy (0% in the Russell 1000 Growth Index).2 Low oil prices and low yields mean there will be some losers and some winners.

Investment Theme No. 2: Low Oil Prices and Yields

3. Stimulus

The unprecedented amount of stimulus injected into the global economy over the past few months has offered a lifeline for individuals, businesses, and economies. While policymakers may have kicked the can down the road, leaving themselves with a mountain of public debt and possibly inflation to deal with another day, the situation would have been much worse without the stimulus they provided.

Investment Theme No. 3: Stimulus

Policymakers are all in—they are unlikely to be able to reverse their policies until the economy finds a strong footing. These policies have created both challenges and opportunities for investors. The three investment ideas here focus on (1) yield scarcity—when cash and government bonds yield close to nothing, (2) piggybacking central banks—buy what they buy, and (3) risk assets—in a flood, everything floats.

4. Recovery

Crises typically go through three phases: meltdown, bear-market rally, and recovery. The meltdown is behind us. However, it is unclear whether the rebound of risk assets from their March lows is a dead cat bounce, meaning markets are likely to go through periods of significant ups and downs, or a sustainable recovery.

Investment Theme No. 4: Recovery

For the recovery to be sustainable, markets needed three things: (1) the peak infection rate to have passed, (2) a convincing and aggressive monetary and fiscal stimulus, and (3) receding volatility. Although all three are in place, many unknowns linger: a risk of a second wave of infections, the ability of a scarred economy to recover, and the pace of returning to a new version of normality. One scenario is for a steep and strong economic recovery in the second half of 2020; another is for a gradual recovery into 2021. One thing is sure: The crisis will end, and a recovery will begin.

The three investment ideas here are (1) diversification—true diversification, not perceived diversification, as some assets (e.g., corporate bonds, commodities) might exhibit low correlation with equities in good times but high correlation in bad times; (2) balancing offense and defense; and (3) flexibility—portfolios must be nimble, ready to adjust.

As always talk to your adviser within the Just Service network if you would like information or otherwise review your savings, investment or pension plans.

For all enquiries email info@justserviceglobal.com

Regards

The Just Service Client Service Team

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Source: Ryan Cooper

A view held by many in the mainstream media is the stock market is a general barometer of economic health. If it's going up, then things are assumed to be going well — and if it falls a lot, then it's time to worry. Thus conservatives in the US have been celebrating the astounding stock rally of the Trump era, which has been more than twice as strong as the average since 1928 for presidents at this point in their term. To be sure, a stock market crash can have serious negative repercussions. But the current booming market is also evidence of a deeply sick economy — one geared to funnel money to the very tippy-top of the wealth distribution, and which is seriously vulnerable to another devastating financial crisis.

The first thing to know about stocks is that a huge fraction of the population owns no stock at all, and only the rich own them in significant quantities. A Gallup poll found that 55 percent of people own any stock — a majority, but most of them own only small amounts. If we break the population into 10 groups (or deciles) based on how much stock they own, we find that the top decile accounts for 86.8 percent of all stocks. The next decile owns 9.5 percent, the third 2.8 percent, and the rest little or nothing. Adding to this, the fraction of GDP going to labour costs has fallen sharply since the 1980s, while the fraction going to corporate profits has increased sharply, and the share of income and wealth taken up by the very rich has skyrocketed.

The broader economy, including all these public corporations, is still based on mass production and consumption. It follows that as inequality grows, the economy will sag and slow, because rich people disproportionately save their income rather than spend it, usually by buying financial assets like stocks. So as the financial markets are swamped by a tidal wave of profits, those stocks, in turn, become ever-more divorced from the health of the underlying corporate enterprise. The result is a marked tendency towards financial bubbles, as oceans of money slosh here and there looking for safe returns that can't exist because the mass public has little disposable income which would justify fresh investment in real enterprises. This is exactly the background that made the Great Depression of the 1930s and the Great Recession after 2008 so bad. The economy was fundamentally unsound, and it took only the kick of a financial panic to knock it over.

The stock market is surging under Trump largely because of the massive tax cuts for corporations and the rich that Republicans passed in 2017. Contrary to their promises, corporations spent most of the windfall not on investment, but on dividends and share buybacks which fuelled gains in the market. Wages, meanwhile, are up slightly, but not anywhere nearly as much as stocks. Overall growth is also weak. This means the stock boom is built on sand — especially given how the Trump administration has dismantled much of the post-2008 financial regulation. I hope the top decile is enjoying themselves, because the good times can't last forever.

As always talk to your adviser within the Just Service network if you would like information or otherwise review your savings, investment or pension plans. For all enquiries email info@justserviceglobal.com

Regards

The Just Service Client Service Team

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Investment Ideas for the Next 12 Months

Where will the market go in 2020: let's look into the US