Another year is winding down and what a year it has been! COVID-19 attacked us all, Chaotic US Presidential elections, one of the greatest stock-market rallies ever observed, ongoing “New All Time Highs” almost every week of the year, then a devastating market crash in the middle of said rally at the end of Q1, only to see one of the most powerful rebounds ever, still rising into the close of 2020... On the way, we had an interesting side-show of Gold rallying against a weakening Dollar as Bitcoin and its cyber brethren were driven to new highs. Both are at the margins given the limited scope of their capitalization. Hardly a factor, but then the Roman Catholic church was “only a religion” 2,000 years ago! The “Fear Index” as measured by the VIX has been at extraordinary highs and then folded back to almost reasonable levels now. Scares galore but, just another side-show. The most bizarre was the US Presidential election though... But this too is over, we hope...
What to make of it all? Arguably the world is experiencing a new “Industrial Revolution”. The information age is taking over many sectors of activity, where data is becoming yet another commodity - It is being mined, refined and resold in new and different forms. Data merchants are becoming the major businesses of the world. The pandemic is accelerating what has been evolving for a few years already, causing a rethink of urbanization. Why commute in trains and cars when we can telecommute? The savings of time compensating for the previously valued interactions, meetings, office coffee breaks, and the like, enrichments of productivity. If we assume that the average worker saves just one hour per day of commute-time, simple algebra suggests that we liberated 12.50% of extra capacity (1 free hour of 8). Yes, we cannot see its effects immediately as we have an adaptation period, but it is a real productivity reserve... Is this the reason why the equity markets have been rallying? Built-in economic growth...
What does this all mean? We are amid a horrible pandemic, true, but then, from a financial/economic perspective it will only accelerate the transition to this new type of world, into the times of data. The “Amazon Effect” of price discovery is permeating into service industries whilst expanding in the universe of goods and products it affects. More and more services are being offered on-line. COVID is moving education on-line. The disintermediation of everything is reshaping most sectors of the economy. In our language, we say “the spreads are narrowing...” – The days of buying for $10 and reselling at $20 for a “10% margin” (😉) are truly coming to an end!
We firmly believe that fears/dreams of inflation are largely misplaced. Our new world (still) has a lot of “intermediation” to be removed, its costs to be charged to the CPI... When applying our thinking to real estate, we find it likely that the driver for rising property values is being attacked from many fronts - Inflation pushing values up? Maybe not as before. Offices and other commercial uses? Well, demand might lighten somewhat with the ‘work-from-home’ trend and the redundancy of BCP platforms moving to ‘Working From Home’ (we know it works, as we have just lived through it). AI & Robotics may further expand the decline in property use, as robots can be packed closer than humans...
More people are likely to spend more time in their residence, less in offices and commutes. The move towards de-urbanisation may accelerate. As our homes are improved, maybe we will not feel so compelled to travel?
As the businesses are going virtual, less and less focus on tangible, real ‘things’, perhaps the stock markets were right in adding so much market cap to the value of ideas, data, thoughts and games? Whilst ignoring the real stuff like stores, production facilities, mines, airplanes, cars and ships?
As we are ardent believers in the wisdom of the dollar-weighted-thoughts expressed in the markets, we continue into next year long in the successes of 2020 i.e., Tech, Biotech, innovation and all that is virtual.
Interest rates? Well, the Chairman of the Federal Reserve, Jerome Powell said it loud and clear - No increases at least through 2023...
That said, whilst there may well be little risk for bonds to fall in price from rising rates there is little reason to own an asset with a zero expected return... Especially when the $900Bn plan that was approved recently is also supporting significant growth in specific areas, one of which is “Green” and ”ESG” related investments in energy and energy infrastructure. We firmly believe that the main benefactors (supported by the legislature that is being passed) will be to support the likes of Hydrogen and Electric. We would say that the hype in EVs is leading to hyperbole in certain subsectors and specific names, but then, when we discount back to the present at zero %, then $1 of revenue in 10, 20 or even 100 years we get one Dollar Present Value!? Hmmm... Zero rates cancel time? We would support Solar, Hydrogen, and infrastructure projects as the way to focus for 2021 and beyond.
With the aforesaid as a backdrop, we will try to look deep into our crystal ball and venture our best guess for key market levels for year-end 2021 herewith. We would caveat all the below with one BIG assumption, we believe that the Senate will remain Republican.
Fundamentally if Governance remains split, the new Administration will be blocked from reversing those Trump-era benefits to markets (Tax breaks and other market friendly bills). Markets prefer continuity. No change is good... Conversely, if the Senate were to swing Democrat, all bets are off...
We remind you that Albert Einstein once said “Making predictions is very difficult, especially about the future...” If the markets’ outlook for unchanged Senate in early January, then we venture that we will see the following:
- Benchmark 10-year US T reasury note yield between 0. 75% and 1. 00%
- Overnight US$, Euro, CHF, Yen rates from -0.75% to 0.25%
- S&P 500 Stock index - now at 3’700 or so, we expect a gain of about 10% to say 4’100
- NASDAQ composite Stock index - now at 12’750 to rise some 15% to 14’700
- Currencies – DX Y , the US$ index – now at 90. 15 to rise towards 95. 00
- Bitcoin - now at about 23’600 – will be between zero and 30’000, or not...
A timely piece of advice - Mail your packages early so the post office can lose them in time for Christmas.
We wish you all a very festive (if socially distanced) holiday period from the EFI team 😊