Stock markets continue to rise. They seem to be ignoring the bad company results that are going to come out in the next few months. Although there are signs that the Covid-19 epidemic is weakening, some sectors such as hospitality are going to be in lock-down for some time. The economy is clearly going into recession with many employees being laid off. The lack of consumer spending, not just because some people have less money to spend, but because others are growing more nervous of spending money or finding fewer things to spend it on, is going to have a wide impact on the economy.
Cash is being put back into the stock market, simply because with very low interest rates there seem to be few good alternatives. The measures taken by central governments to refloat the economy will promote asset inflation so these trends may continue.
Investment trusts I hold which are popular with private investors seem to be some gainers from this market enthusiasm with their discounts narrowing again. Small cap stocks are also recovering and with very low liquidity just a few trades can raise their prices dramatically for no good reason. Or sharply reverse when a few sellers think the prices have risen too far. Rational judgement on share prices flies out the window when share prices are being driven primarily by momentum.
My portfolio continues to follow the market trend as it is very diversified even though I don’t hold shares in the sectors worst hit by the epidemic. I may have to put cash back into my ISAs which I withdrew only in March after making some sales. I have been buying a few large cap stocks which is not usual for me. I tend to avoid FTSE-100 companies as their share prices are driven by professional analysts’ comments, by geo-political concerns, by general economic trends and by commodity prices. You can buy a FTSE-100 company and soon find it’s going downhill because one influential analyst has decided its prospects are not as they previously thought.
But I did start buying a couple of big miners, BHP and Rio Tinto, in March which has worked out well. I considered the fundamentals sound and China, which is their major market, was clearly recovering and getting back to work rapidly. There was an interesting article in the Financial Times a couple of days ago highlighting other reasons why they are doing well. It was headlined “Australia’s iron ore miners exploit supply gap as Covid-19 hobbles rivals”. It explained how BHP, Rio Tinto and Fortescue Metals Group were capitalising on the production problems of their competitors in Brazil and South Africa who have been badly hit by the epidemic, while demand has remained buoyant. In Australia, where most of the mining is in Western Australia, they took vigorous action to halt the virus early on and most of the workers fly in and out so are easy to monitor. It seems that this unexpected turn of events has helped rather than hindered my investment performance for a change.
Although I am confident that the economy will recover in due course, and stock markets will follow that trend as they always must do, in the short term I find it difficult to be positive. It is hard to identify companies where one is both confident that they won’t be badly affected by the epidemic in the short term and where one can reasonably accurately forecast their future earnings. It’s the opposite of shooting fish in a barrel to use a bad metaphor. Together with the uncertainty of whether we will get a second virus wave, whether a working vaccine will be found, the impact of Brexit and the prospect of higher taxes, mine and the confidence of other investors must surely be low. In the short term, growth in company profits is going to be hard to come by, which is often the major driver for improving share prices.
But the market is ignoring that. It reminds me of the infamous saying of Citigroup CEO Chuck Prince during the last big financial crisis – “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.”
Unfortunately judging when to move in and out of markets is not a skill that most investors have and so I will stick to trend following while keeping a sharp eye on events.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
