As you may recall, in our previous letter we anticipated rising stock markets, led by small companies (initially) and, paradoxically, by sectors that have been greatly affected by the pandemic. The market is moving in the right direction and all our funds and mandates are positioned with stellar returns, above their respective benchmarks. But what satisfies us most is that our funds, your capital, has reached historical highs, with positive returns for each and every client that has trusted us with their savings. For the investment team your trust is the very best stimuli.

Looking forward to the future now:  How are stock markets expected to behave after a recession? Statistically they rise in the second year, even if they have recovered enormously from the lows (as is the case). This year the stock market is being led by the cyclical sectors that allowed us to live life with all five senses (subject of our previous letter), and this will continue, as the population is vaccinated. Very expansive monetary and fiscal policy, economic growth and better results from business allow us to be optimistic for the rest of the year. If corrections occur, which will no doubt take place and are healthy, we believe they may be short lived and should be used to increase exposure to equities and to carry out sector adjustments.

How does fixed income react after a recession? In general, with negative returns (on government bond prices / higher yields to be expected) and more so if accompanied by expansive fiscal policies. In this first phase, which is where we are, falling bond prices respond to the economic recovery and do not adversely affect the stock markets beyond small corrections. Having so far correctly anticipated events, your capital has not been adversely affected by an adverse fixed income backdrop, as we have very low durations across the funds and mandates. Will there be a second big uptick in bond yields after the large move we have had year to date? We expect so but not this year, and when it does occur depending on the speed of the yield uptick it could negatively affect the equity markets. In any case, the “mixed” nature of our funds allows us to reposition them in the different assets according to the set up and backdrop at any given point in time.

Before signing off this brief update I highlight one last thought regarding the “manias” or financial bubbles that are arguably building.  In the first part of the quarter we witnessed certain episodes confirming certain bubbles. Many of us were puzzled by the behaviour of companies such as Gamestop (operates stores specializing in electronic games) which was in dire financial difficulties, other “penny” stocks that were targeted by the retail community, and the performance of some SPACs (special purpose acquisition companies that accelerate the IPO process).

Manias or bubbles are based and initiated on good and solid economic fundamentals. When they reach their speculative phase, and we see prices rise we – the market participants – try to justify valuations by applying projections that stray too far from reality. Now more than ever, understanding what’s happening makes it necessary to read a classic written by Charles P. Kindleberger  “Manias, Panics and Crashes finances”.

Whilst the majority of cross our fingers and wait patiently for the vaccine, others will be seduced by greed…….over to them. I meanwhile will stick by a rule I learnt years ago; being greedy can sometimes rip the sack open.



Chief Investment Officer

Loreto Inversiones SGIIC

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