Blain’s Morning Porridge, Nov 12 2020: Aint over till it’s over..

Life is a shipwreck, but we must not forget to sing in the lifeboats.”

Whatever markets thought on Monday after Pfizer announced salvation from Coronavirus.… we are not saved… yet! The brutal reality is we’re still locked on our lifeboat, in the middle of shark (virus) infested seas, and its 1000 miles to land in any direction. The virus will continue to dominate headlines through the winter as infections, hospital admissions and deaths continue to rise across the West.

The news out the US of a larger 3rd wave spike, and the UK passing 50,000 dead, confirm that although the war might be won, the battles will continue. The difference is we know it’s going to end – the vaccines are coming. Life will resume as normal – just not immediately… not as quickly as the market appeared to believe Monday.

The immediate reaction to the first virus news earlier this week was “reversal”: Dump the stocks that did so well under pandemic conditions and buy the sectors that were battered. That was hailed as the great “rotation”out of tech stocks and into firms with good “fundamentals”.  If you timed it well – as apparently the CEO of Pfizer might have – it was a great buying opportunity.

Markets have been making a more sober assessment as the week has wound on. The simple rotation analysis ignored the facts about how much the world has changed, and about the way we adopt and accept new ideas and Tech for the long-term. Zoom and Teams will remain critical business tools and will become even more refined in the way we use them. Consumers are not going to dump their streaming channels.

Most, if not all, new revenue streams are created in the Tech Sector from either doing something old better and more profitably, or inventing a completely new way to extract cash. The accelerated and early adoption of new tech is likely to mean the FAMAG names remain among the key out-performing equites as strong tech with strong fundamentals!

If I was to pick an approach towards the end of the pandemic it would be leaven up tech weightings with selected recovery stocks – being selective on finance, oil, travel, retail and hospitality winners. (Or, to put it another way; constructing a broadly-based diversified portfolio as a response to “normalisation”.)

Investing on fundamentals is never a bad idea, but firms that were making solid, sustainable high-quality profits (being dull, boring and predictably successful) will still face changed-world challenges as a result of pandemic.

I suspect there are a large number of firms likely to still go bust or forced to re-scale – even as the end of the crisis is coming. That may be because their solvency has been so weakened by the pandemic. It may be steepening yield curves and hints of rising rates push zombie companies into oblivion. Or, it may simply be the world has changed so much that previously comfortable business niches have been wiped out or made more challenging these last 8 months.

For instance; how much of a land grab will Amazon successful retain across the retail sector? It’s a mark of the madness of these days that shops in the UK open during lockdown are not allowed to sell non-essential items as that would be unfair to shops that weren’t allowed to open, but you can still go buy the same goods from the Web.

What’s likely to be interesting is to see just how much more resilient the surviving names may be – the retail firms that survive could well thrive as we rediscover the joy of going out shopping, which airlines are set to take off fastest, grabbing market share and profitability, which Cruise liners will be printing money from renewed bookings, and which oil firms are most successfully making the transition to becoming energy firms with a focus on renewables. How long will banks suffer from the long-term effects of the pandemic recession?

It’s time to put your stock-picking hat on…

Meanwhile…. Don’t forget the Macro. 

Although everyone is gung-ho about the prospects of a V-Shaped, or maybe a lop-sided W, recovery, the reality is Stock Prices remain highly distorted by the effects of unnaturally low interest rates. Returns on stocks look better relative value than bonds – but that’s only because bond yields are so low. The reality remains stocks were priced at extremely high historical levels before the Coronavirus hit. With the global economy posting negative growth through 2020 (every country, bar China), does it justify yet higher prices?

There are plenty of warnings about P/E, and just about every other stock market measure of danger. One on hand stocks look vulnerable to correction. On the other, can global central banks afford to remove the low interest rate and QE crutch that sustains prices? Absolutely not! The last thing the global economy needs now would be a confidence sapping market crash.

But does the economy need further stimulus if the vaccines are on the way? I suspect they will help companies through the transition back to normalisation and if jobs and SMEs can be sustained – and that’s a good base.

How dangerous are rising levels of Sovereign debt? Governments have become very comfortable pumping money into their economies. They are showing little hesitancy in raising debt – how dangerous is that?

Conventional wisdom says government debt crowds out private investment, and over 70% debt to GDP an economy starts to falter on too much debt. I question that equation. Everyone says Japan is in crisis because of its 214% debt to GDP ratio – but nearly all JGBs are held by the Bank of Japan. The Bank of England holds a significant part of the Gilt market – get rid of that and the debt level looks fine – it’s just a number. I suggest the Treasury gives the BOE a One Trillion Pound Banknote (the ultimate zero-coupon perpetual) in return for writing off the nearly £1 trillion Gilts held by the bank.

I’d go even further – governments should borrow more and go spend on recovery, infrastructure and especially Health and Education – but that a story for another day…

Of course, the Morning Porridge would not be the porridge without a sting in the tail.. As usual its something revealing my status as an investment idiot:

The speed at which China recovered from the Pandemic, and the likelihood it will continue to post stronger growth and rising consumer wealth made it the no-brainer trade of the year… Except, of course, there is never a no-brainer. My switch into China Tech and stocks has been my worst performing investment of the year – coming just in time to catch the crash in Alibaba as the Chinese government decided on a public chastisement of Jack Ma and to reel in its fintech sector.

The point is – the unexpected, irrational and no-see-ems will always drive markets.

For instance.. look at the mess in Downing Street this morning… Now.. I wonder why Carrie got so antsy….? Hah!

Five Things to Read This Morning

BBerg – JP Morgan May be less Risky But The Finance System Isn’t

FT – UK economy grew by a record 15.5% before latest lockdown

City AM – Green Bonds are misguided, counter-productive and an investment handicap

BBerg – Why Trump Fears Leaving The White House

WSJ – Trump’s Aims to Block Certification of Biden Victory in Key States


If you’d asked me a year ago what my future held, it would have been four days a week commuting up to London, endless hours wasted on delayed or cancelled trains, and the occasional working from home day. Today, my future is reversed – I will do most of my work from home, and London trips will become my guilty pleasure – meetings and lunches with clients. I’m going to do even more colleague entertaining close to home – sailing or walking together to talk business and fun together.

I must admit – I’ve adapted pretty well the to the new world. Its therefore time to admit my dark secret: what I did during the summer. I don’t know if any clients or readers noticed, but for 6 weeks during the summer I was working from my yacht. It’s time to come clean – I’ve written about it in this month’s Property Chronicle.

Out of time and back to the day job!

Bill Blain

Shard Capital