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LIVING LIFE WITH FIVE SENSES.
Market Situation. December 2020.
We all know the difficulty of predicting the behaviour of stock markets, but 2020 will be remembered for being a particularly complex year. A pandemic, the global economic downturn, the deepest recession since the 1930s, a collapse of the world stock markets and now, nine months later, all-time highs for the American stock market and with a fall of circa 5% in Eurostoxx 50 index, year to date. The mantra that managers abide by “invest for the medium / long term” makes more sense in the current set up. To recap, the recovery phase after the COVID-19 recession began in the third quarter. However fear of a second confinement, together with the uncertainty about the American elections, produced important hits to markets in October. Note for the first time in a long time, technology and so-called growth stocks suffered major corrections, equal to or greater than the rest of the market.
Precisely two senses are linked to the aforementioned sectors, stocks such as Zoom, Spotify, Netflix … they are sight and hearing. On the other hand, those sectors most affected by the pandemic, and some that we can relate to via taste and smell namely hotels, airlines, restaurants, coffee shops, energy or banks (latter two sectors evidently not associated with taste or smell), began to have a better relative stock market performance. The market could be anticipating something. LIVING LIFE WITH THE FIVE SENSES is more important than we were taking for granted. What is clear is that the meaning par excellence for 2021, even if not directly listed on the stock market, will be “touch”.
Throughout September and October we adapted our portfolios to the investment thesis that we reflected in our previous letter: vaccination before the end of the year and less harsh confinements. We have begun to reap the fruits of our decisions. As of November 24, all of our funds had positive returns year to date, with Loreto Premium Global FI leading the way with a return of more than 3%, compared to a negative return of -4.48% for the Eurostoxx.
The next question is obvious: what now? With high savings rates, pent up demand created by Covid, low oil prices, low interest rates, an expansive fiscal policy and highly effective vaccines, we can consider that we are at the beginning of the exit from recession and that it is very likely that we will experience a synchronized global economic recovery in 2021. We anticipate having a constructive backdrop for the global stock market and in particular areas such as smaller capitalized companies and emerging markets. The process of sectoral normalization should continue, as life is lived with the five senses.
We would like to highlight two reflections in the current environment: As Mark Twain says “History never repeats itself but it rhymes”. The behavior of a part of the technology sector and some other occurrences remind me of my earlier years in the stock market in the late 90s. There are many similarities, such as the excessive retail participation, financial influencers, “fashionable” companies entering into important indices, astronomical valuations, but also differences, such as a different phase of the cycle and very low rates, which suggest that these bubbles can be extended over time. We continue to prefer certain stocks that are associated with healthcare or biotechnology, …, which offer better compelling valuations in the context of their growth outlook and returns. In any case, stock by stock, stock selection is paramount.
Finally, on the much talked about “WFH*” and videoconferencing, and how it could affect the airline industry, a sector from which we, Loreto Inversiones was born as an asset manager.
Albert Einstein says that:
“Creativity is born from anguish, just like the day is born form the dark night. It is in crisis that inventiveness is born, as well as discoveries made and big strategies. He who overcomes crisis, overcomes himself, without getting overcome. He who blames his failure to a crisis neglects his own talent and is more interested in problems than in solutions. Incompetence is the true crisis. The greatest inconvenience of people and nations is the laziness with which they attempt to find the solutions to their problems”.
Let us not forget that these technologies make life more impersonal. Companies will have a challenge: “To generate a company’s culture and commitment” in their staff. Nobody wants “mercenaries” on their payroll. How about team building trips to enhance the sense of “a team”, taking advantage of the good winter weather in Spain? Could Spain attract qualified international “WFH” staff, who can generate air traffic by establishing their primary residence here? If there is something that the pandemic has generated, it is that almost 50% of the population suffers from some sort of anxiety or depression. More than ever we need vitamin D, sun and travel. There is always light at the end of the tunnel …
JOSE LUIS GARCIA MUELAS
Director de Inversiones
Loreto Inversiones SGIIC
* The psychological impact of WFH: The paper examines the psychological impact of teleworking compared to office-based work. Results suggest a negative emotional impact of teleworking, particularly in terms of such emotions as loneliness, irritability, worry and guilt, and that teleworkers experience significantly more mental health symptoms of stress than office-workers and slightly more physical health symptoms.
Study carried out by Sandi Mann and Lynn Holdsworth