2020 Hindsight is a Wonderful Thing


17th December 2020

By Delft Partners

Time to review 2020 and prognosticate about 2021. Around this time last year, we wrote the following, titled “2019 A surprisingly good year for risk assets” https://www.delftpartners.com/news/views/2019-a-surprisingly-good-year-for-risk-assets-2020-outlook.html

The cautious stance looked ok even before Covid-19 kicked in and reduced the global economy to a standstill. Our stance on Japan was positive and we continued to bemoan the lack of an intelligent fiscal policy globally; and we wanted the cessation of the ‘monetary policy for rich people’ aka Zero Interest Rate Policy.

Someone might be partly listening because we now have a plethora of fiscal incentives being discussed, which should (finally) help to improve productivity and growth potential on a sustainable basis. Check out the (lack of) GDP per capita growth in most Western style economies if you believe ZIRP has produced anything other than a reflated asset souffle; and MUCH more debt risk; oh and made a lot of already wealthy asset owning people wealthier while doing nothing to shift the wages vs profits pendulum back.

Speaking of debts. The COVID-19 response has shovelled more debt onto future generations. This can’t be paid back, shouldn’t be paid back, and so won’t be paid back. Currently inflation is everyone’s good idea (not ours) of the way to deal with this debt overhang. Let’s just say that:- it’s risible that policy makers believe that exactly the right amount of inflation can be created; that it will inflate away the value of debts to the benefit of only the most deserving indebted; that bond investors won’t finally notice and demand higher coupons at issuance; and that if released, inflation can immediately be bottled up when the correct amount of debt destruction has been reached and we can avoid high inflation, capital flight and capital controls.

If there is too much debt (and there is) and you think that some segments of society deserve a reprieve, then a MUCH BETTER WAY is to have focussed debt forgiveness and write it off. The incoming (?) Biden administration is examining writing off significant amounts of student debt. We would also politely suggest that the Virtue Signalling ‘Tech Luvvies’ might also think about having their companies pay some tax? We see that Mr Musk has moved to Texas because of the apparent “lack of support for tech industries now in California”.

Hah- Oh yeah? Nothing to do with significant differences in state tax and their likely trajectories then? Moving from California will save him a bundle. A dirty little secret of the Trump administration is that he RAISED taxes significantly through reductions in offset allowances between state and federal filings. This hit the Democrat states hardest and the population shift South and East in the USA is quite remarkable. Add one more person to the “I love California it’s sooo liberal but I have moved to Texas reluctantly” list.

https://www.thedrive.com/news/36430/u-haul-prices-for-one-way-moves-out-of-california-are-astronomical-right-now

2020 was ok and the best thing we did was to not panic in April and remain invested. It’s our investment philosophy that timing markets, risk factors and style shifts is difficult and dangerous.

So, what do we make of 2021? Here are some thoughts and they are brief because we know everyone has a crystal ball out currently.

  • Japan becomes a more popular investment destination. The market continues a multi-year re-rating. It’s been a stealth bull market in Japan already, but most Australian based ‘global’ fund managers don’t know where it is let alone what’s happening there. https://www.delftpartners.com/news/views/improving-returns-for-shareholders-in-japan.html We frankly don’t mind too much with whom you invest there but invest there you should. Now. Under-owned, undervalued, underleveraged, underappreciated.
  • National Industrial Policy continues to be expanded. It started a year or two back and when President Trump invoked the 1950 Defense Procurement Act, to force the likes of 3M and GM to produce ventilators and face-masks, it was ‘game-on’. Europe has been trying (with not much success) for a few years and China has acknowledged it is about as popular globally as a rattlesnake in a lucky dip, so is becoming less reliant on USA tech, and more explicitly favouring self-reliance – namely through its newly announced policy of ‘Made in China 2025’. This has positive implications for supply chain companies (We like Kerry Logistics for example) R&D, and corporate fiscal spending. Transport stocks are quite intriguing which leads us onto…
  • National Industrial Policy continues to be expanded. It started a year or two back and when President Trump invoked the 1950 Defense Procurement Act, to force the likes of 3M and GM to produce ventilators and face-masks, it was ‘game-on’. Europe has been trying (with not much success) for a few years and China has acknowledged it is about as popular globally as a rattlesnake in a lucky dip, so is becoming less reliant on USA tech, and more explicitly favouring self-reliance – namely through its newly announced policy of ‘Made in China 2025’. This has positive implications for supply chain companies (We like Kerry Logistics for example) R&D, and corporate fiscal spending. Transport stocks are quite intriguing which leads us onto…
  • The USA yield curve continues to steepen AND investors finally notice. Anyone who has listened or watched AusbizTV on Friday mornings may have heard us continually state that the yield curve is steepening; that the recent Jackson Hole speech by Governor Powell explicitly said nothing about Yield Curve Containment (https://www.delftpartners.com/news/views/some-thoughts-on-jackson-hole.html, https://www.delftpartners.com/news/views/jackson-hole-part-2-reality-coming.html); and that a steepening yield curve has in the past changed the leadership of the equity market. With a steeper yield curve, Value beats Growth, cyclicals over staples, that sort of thing. Now while we fully understand that the yield curve has been kept at zero and flat, out to 10 years +, for a while, and that has recently changed the relationships between cost of capital for equities and investor preferences for dividends, it is very unlikely that normal service won’t be resumed; meaning watch out if you own a bunch of junk with highly questionable growth prospects, aggressive accounting and promotional management. See the trend in the shape of the yield curve below. We are pretty certain that 2021 produces another test of the Fed mettle and will they blink first in the face of another taper tantrum? If the new Treasury Secretary, Janet Yellen, is true to her word, then she will be looking to create jobs with fiscal largesse, and this will take up a lot of slack in the economy, thus raising inflate expectations. Interest rates should rise at the long end and even if they don’t, markets will think about it a lot more which is kind of the JM Keynes beauty judging contest.
  • Incidentally, if you wish to see what inflation looks like without all the adjustments to baskets and the recent use of hedonic methodologies etc, check this out:-http://www.shadowstats.com/alternate_data/inflation-charts They calculate inflation today on the 1990methodology. 4-6% feels a lot more like what we experience in the way of price inflation? Anyone tried to renew insurance policies recently? Cost of an annuity stream has never been higher…just saying.
  • • Asia becomes an investment powerhouse. Politicians get on much better with each other and the markets remove the discount for the Chinese invasion. Mercantilism essentially always triumphs political purity in Asia. The new Prime Minister in Japan, Suga-san is more acceptable than his predecessors, to Asian countries for a number of reasons. His visits to Vietnam and calls to India are not accidental. China knows that there has to be some retreat from its overly aggressive stance. It will be back to ‘business as usual’ we believe, which means a lot of political posturing but a lot of intra- regional FDI and cooperation. You can choose to listen to the politicians or follow the money. We know what we do.https://www.delftpartners.com/news/views/the-asian-opportunity.html

Good Luck for 2021. As ever don't hesitate to get in touch.


DISCLAIMER
This report provides general information only and does not take into account the investment objectives, financial circumstances or needs of any person. To the maximum extent permitted by law, Delft Partners Pty Ltd, its directors and employees accept no liability for any loss or damage incurred as a result of any action taken or not taken on the basis of the information contained in the report or any omissions or errors within it. It is advisable that you obtain professional independent financial, legal and taxation advice before making any financial investment decision. Delft Partners Pty Ltd does not guarantee the repayment of capital, the payment of income, or the performance of its investments. Delft Partners operates as owner of API Capital Advisory Pty Ltd AFSL 329133.