How to preserve money in the future
If one looks at the price development in many stock markets over the past ten years, it looks like a stable linear increase, where investors are now on a mountain top. Some may even argue that it is a mountain peak that the stock market has moved-up to. Looking back, graphic one clearly illustrates the cleft from March. Depending on where you are on the entertainment timeline, it seemed as if a fairy from a fairy-tale was pulling the stock market up, or if you are into gaming, investors were suddenly allocated a supernatural force so they could quickly climb up the gorge again. Those who argue that the market is at the very top of the mountain peak will claim that the rise, which the stock markets have experienced from the bottom in March, is a fairy tale, and from the mountain peak, one simply looks down into the abyss–but is it really the case?
Tactically, that question is incredibly exciting to deal with. The US presidential election will play a role, but as long as the election proceeds sensibly, I expect the US stock market to absorb the election result in a reasonable manner.
In my view, the global stock market has not yet recognized that Covid-19 is starting to disturb many countries again, including mobility and the economy. It is my best belief that many investors expect more vaccines to be available before the end of the first quarter of 2021. This might be optimistic, as one or more vaccines will most likely be developed, but the supply will not be sufficient, and perhaps every human being will need to be vaccinated several times, no one knows yet. The conclusion is that the next six to nine months may well be a volatile time for the stock market, but after that period, other forces will take over.
It is simply the question about how to invest the capital in the future? The US Federal Reserve Bank has announced that there will be no interest rate hikes until the end of 2022. It would be a shock if the Bank of Japan were to simply mention the words “rate hike” and the European Central Bank follows suit without rate hikes, as far as the eye can see. The consequence of this monetary policy environment is a bond market, where investors must constantly search for marginal markets and take bigger risks in order to find a return at all.
Graphic two shows annual inflation in the EU, where the rate of increase before the Covid-19 crisis was already declining, and since then, inflation in Europe has fallen to zero, and even below. The very fixed monetary outlook is forcing a changed strategic stance on bonds, where equities is the classic alternative. From conversations with several investors, I can feel that real estate investments are once again coming into play, which contains a concern in my view. I do not consider the more marginal asset classes such as gold as a realistic alternative for several reasons, the same goes for other commodities.
Maintaining a high allocation to bonds also means investing in the global debt mountain, where corporate bonds end up being the least concern. In my opinion, government bonds have the greatest potential to trigger an investor flight, which in turn, could tempt investors to choose to invest in companies that typically make a profit and increase the allocation to stocks. I expect these considerations to gain increasing weight post Covid-19 crisis. It is not necessarily an active move to increase the allocation to equities, but in reality, a pressure in that direction, which is a common force in the financial markets.
If one chooses to follow this strategic path, then the key with an increased allocation to stocks is precisely in the name of capital preservation. Thus, companies, predominantly the global companies, will make up an even larger share of the investment portfolio, just as they will do in societies in the future. That is also to stress that my statement is not that stocks are generally undervalued, and we haven’t invented a new model for valuing stocks, that can argue for that scenario.
The important point is that even being at the mountain peak of the market, it makes good sense to talk about additional allocation to stocks, if one includes the strategic view. An important element in the financial market is timing, so the next consideration could be when a change in the allocation should take place.
That would depend on an incredible number of factors, where the normal execution methodology that the investor usually uses also weighs heavily in this situation. Some investors make the decision and adjust their portfolio immediately, while others incorporate the decision over time. I could very well imagine that many investors would change the composition of their equity portfolios at the same time, as I have no doubt that the crisis will continue to affect both geographical and sectoral choices over the next 12 months. In terms of timing, it would be appropriate for strategic allocations to take place before the end of this year, or it will happen sometime in the coming year. The aforementioned tactical uncertainty may therefore find a counterweight from strategic investors, which will be interesting. In connection with this, I must mention that my view about an increased strategic weighting in equities is relatively new and may accommodate final adjustments.
