At the beginning of this year, I had made five rather bold predictions and this week we thought it timely to revisit them. With hindsight, some of them were downright comical and some right but for perhaps the wrong reasons. Whatever maybe the case, the one thing that as investors we should always seek to do is to constantly assess and reassess our assumptions as facts change.
I still remain an ardent believer in the evergreen words of Keynes, “when the facts change, I change my mind.”
Prediction 1 – The coronavirus will be forgotten by July
Ouch! The only silver-lining for this prediction is that I didn’t specify the year of this particular July, could be July 2022? Sad attempt at humour aside, this is one aspect that I must admit to being wrong. On the face value, my thesis was to keep in mind only the fatality rate (which, while substantially higher than the common flu, is not astronomical) and not question whether a public health issue might be politicised to the extent it was or the policy makers reactions, and myriad they were, across the West. The optimistic idealist in me may have had the reins on this prediction.
What we were certain of at the time were that the draconian measures being undertaken by the Chinese state would keep the virus contained. And to a certain extent, this was true given that China not only recovered but is quite possibly the one economy in the G20 that is tracking to grow by a rate that, cumulatively (based on current trajectory), will place it within status quo by Q4 next year (i.e. they are effectively exactly where they would be even if the virus hadn’t been in existence). In a sense, the sell-off in Chinese indices was thus probably unwarranted.
In our assumptions we took the base case as a history repeats itself scenario (i.e. Spanish Flu). Not the amount of government induced lockdowns or the fact that our societal structures had evolved enough to not have a laissez-faire approach to the situation. Even in nations where this has been the case, especially the US, we have seen a politicisation of what is essentially a public health issue. I was also surprised by the responses across much of developed Asia including South Korea, Taiwan and even Australia.
I would like to think that if there were a unified and coordinated approach along a global consensus, we may have got this one a bit closer to correct. But that was probably a shade idealistic (just a smidge). The US couldn't even get a unified approach in their own country, with Blue states typically taking the hardline lockdown approach and Red states effectively just letting it rip, nullifying the approach of the other. Unfortunately, the cat is out of the bag at this point. We won’t even get into the ongoing politicisation of it.
Nevertheless, this is one prediction that I will live to regret. But, as the old adage goes, hope for the best, plan for the worst.
Prediction 2 - A new round of QE will take place
This one happened! And with greater speed and rapidity than we expected. It is rather convenient to say now that Covid was what created or catalysed the need for QE. But the fact that we made the call despite the fact that we did not (at the time) take the virus and its ramifications as seriously as we should have tells us two things; 1) the global financial system pre-crisis was weak at best and markets were already relying on monetary stimulus to be propped up; and 2) the crisis sped up the process and made it even more difficult to normalise monetary policy.
Even without the pandemic induced crisis, we had assumed that most of the securities, especially treasuries, would be allowed to go to expiration on the balance sheets of central banks. A scenario the crisis has effectively ensured. If at the levels of debt-to-GDP pre-crisis we found it unlikely that policy would be normalised, at this stage we can effectively rule it out. We will see the continued expansion of fiscal stimulus going forward with central banks effectively monetising debt.
Prediction 4 - Trump wins re-election against either Joe Biden or Bernie Sanders
Well, if one is to believe the Tweeter-in-Chief, we got this one spot on. But let's get back to reality. We had predicted that Joe Biden would get the nomination and, while Democrats would once again carry the popular vote, Trump might win anyway via the Electoral College. Half of this prediction was right and it was closer than most expected at the time. The other thing to consider was that this prediction was made prior to seeing just how badly the Trump administration bungled the coronavirus response.
What it has brought to the fore is the sheer divisiveness of the American political landscape. An aspect playing an increasing role going forward for market participants. What was perhaps more interesting to watch has been that gridlock is something the markets actually prefer (apart from consensus stimulus). What we will be hoping for (as market participants and political alignment aside) is a divided house (the Georgia run offs will be key) that places checks the more ambitious within the Democratic party.
Prediction 5 - Gold will break above 1700 USD but equities continue to melt-up
This is one that I am quite proud of, in terms of how the thesis played out. Not only did the yellow metal break above 1700 but reached the 2000 mark. This despite equities continuing to drive higher. Though this has been one asset class that has seen sell-offs in recent times due to vaccine news, I continue to be rather bullish (with the caveat that it will be volatile).
Given the amount of fiscal stimulus and the unlikeliness of changes to monetary policy, we will see it go up and do so in parallel with equities. My view is rather different from the norm. Most people and investors perceive gold as a hedge against inflation. It is not. It is a hedge against uncertainty. What impacts it more is the yield on risk free assets such as treasuries and investment grade bonds. If one can assume that monetary policy stays as is, we will continue to see a scenario where equities drive higher with investors using gold as a hedge for the portfolio (as opposed to the historic allocation towards bonds or treasuries). My next target? 3000 USD by Q1 2022.
Make sure you tune in next week as I look to make some predictions for 2021 (if I can maintain a 3.5/5 strike rate, I’ll be ecstatic).
Markets & Commentary
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