Is After the Storm Before the Storm?
The good news first: the average account with our Swiss partner Bank Reyl, only has taken about 30% of the hit global financial markets took since January 1st. In other words, while markets were down almost 40% from their highs this week, most of our Swiss accounts were down between 10 - 15%, with the more aggressive strategies taking a hit of around 20%. Furthermore, our managed accounts with custody in the United States were down less than 10% since the beginning of the year as of yesterday, thanks to a cautious approach in equity exposure as well as an aggressively implemented hedging strategy since March. As of earlier this week, we have squared most of our hedging trades since we believe that the market is close to a bottom at this point. While we expect days with significant swings in both directions still ahead, we do not foresee an additional decline in global equity markets of more than 5 - 10% for the time being.
Of course, one of the key indicators on how quickly the global economy as well as the U.S. economy in particular will recover, can be found in the response to how quickly the economic shut-down will be lifted and businesses will be allowed to get back to normal. We still expect a recession to hit the United States in Q2 with its effects lasting at least into Q3. Hopefully, the economy will be getting back into a growth pattern by the end of the year. From our perspective, this is a best case scenario and we foresee a rather sluggish growth and recovery process in 2021. The very extreme measures taken by governments around the world are likely to create multiple problems and issues that will need to be dealt with long after this current crisis will be over. In this regard, I would specifically like to recommend the following two articles recently published by the Wall Street Journal:
"Rethinking the Coronavirus Shutdown"
"Is the Coronavirus as Deadly as They Say?"
While the first article sheds more light on the possible economic and human cost caused by an economic shutdown versus the actual threat from the virus itself - a fear that we voiced on May 13th - the second article, written by two Professors of Medicine at Stanford, questions the actual severity of the virus and argues that its true mortality rate could end-up being significantly lower than stated by the media as well as healthcare and government officials, comparable to a severe flu season. If the latter should turn out to be true, the decision to execute on an economic standstill should be even more scrutinized in the aftermath as any government action should always address any problems in a proportional manner and without interfering with the freedoms and liberties of a free society more than absolutely necessary. While it can be argued that extreme measures against a possible pandemic of unknown proportions early on can save millions of lives, the fact remains that in this crisis many drastic decisions were taken without much of scientific evidence, some even without having had any reliable numbers at all. Additionally, it cannot be ignored that some state and city governments have gone to extreme lengths such as Governor Gavin Newsome of California, who e.g. decided to punish his fellow citizens for taking a hike or an excursion in one of the many state parks; in his own words, he told Califonians he is "closing parking lots at state parks to help you help yourself". A troubling development for every freedom loving and self-responsible citizen in a state that once was the "Shining City on a Hill" as proclaimed by its former Governor and future President, Ronald Reagan. Even one step further went Los Angeles Mayor Eric Garcetti who admonished people Monday for crowding beaches and trails. He told them to "stop it", adding: “We know who you are.” He also informed the public in an unprecedented announcement today that "water and power will be shut off for nonessential businesses that don't close". In our opinion, definitely a concern that we believe could have a long-term negative effect on investors who will think twice before making future investments in such "nonessential" businesses.
While unemployment by the millions will hit the American economy this year, it is questionable how many of the laid-off workers will be able to re-integrate once we see a recovery. Lessons from other countries unfortunately show that if government substantially expands its social welfare state in times of crisis, it almost always struggles in cutting back on those measures during a recovery. Furthermore, many people on welfare are regularly experiencing a real challenge trying to reintegrate in the workforce and very often become permanent victims of what was supposed to be help on a temporary basis only. Germany is an excellent example and became the poster child of such a development with its Hartz IV reform, turning into Europe's largest welfare state. At the same time, corporations that lay off workers and cut salaries in times of despair are very unlikely to bump those salary cuts or rehire back to pre-crisis levels as private entrepreneurs tend to become more efficient once they will have learned how to run their operation more efficiently with less people at lower cost.
As far as our outlook is concerned, we advise to keep on cautiously buying dividend yielding and value stocks with strong balance sheets during down-days as well as some of the most hit companies that have a relatively high likelihood of getting their business back on track once this crisis is over. This includes companies that are likely to receive government aid in one form or the other. As we look at companies in the States, Europe, and Asia, we are specifically interested in Chinese companies where the latest figures indicate that local investors have started investing in the stock market again, knowing that the Chinese economy will always have the opportunity to fallback fully on the practically unlimited resources of the government's balance sheet. Latest polls also show above-average confidence in newly gained innovation within the corporate world in post crisis China.
We are of the opinion that the worst of the stock market correction is over for now. As it functions as a leading economic indicator however, the mid- to long term social and economic problems created as aforementioned, as well as a whole bundle of new aid packages in the trillions of dollars, more artificial monetary interference by the Federal Reserve, including negative interest rates in the United States for the first time ever, make it likely that this crisis has created the perfect ingredients for another storm that will be coming to an economy near you, sooner or later. Therefore, we are convinced that international diversification and asset protection have become more important than ever and remain at your service should you have any questions or concerns.
Oliver E. Hohermuth, Principal & Chief Investment Officer