Virus vs Vaccine and spending – Quarterly Economic and Financial Markets Commentary January 2021 – Kiwi Investor Blog

Key Developments over the Quarter

  • Regulatory approval of Covid-19 vaccine and commencement of global immunisation program
  • Democrat Party’s eventual control of Presidency, Senate, and House of Representatives will provide further support to the US economy from an increase in government spending
  • US Federal Reserve’s decision to adopt a more flexible “average inflation targeting” policy

In recent months there has been a tug of war between rising Covid-19 infections and the development, approval, and initial distribution of a Covid-19 vaccine.

Increasingly the roll out of the vaccine will win this battle, helped by increased spending in the US and ultra-low interest rates around the world.  This is supportive of global economic activity and sharemarkets in 2021.

Key Risks

  • The Covid-19 vaccines are less effective than anticipated, particularly given existence of different strains
  • The US Federal Reserve change their policy settings earlier than expected
  • US consumers are cautious preferring to save rather than spend more of their $2,000 government handout
  • There is the risk that global economic activity surprises on the upside in 2021

Portfolio Considerations

  • Prefer equities over fixed income on a 12 – 18 months time horizon
  • Shorten duration exposures of portfolios
  • Emerging markets, cyclicals, and value to outperform
  • Any sharemarket pull-back should be seen as an opportunity to add too equities
  • Start preparing portfolios for a period of higher inflation

Effective and efficient implementation of investment strategies key.

Vaccine Roll Out

A successful vaccine has been developed in record time, less than one year.  The previous record for the fastest time to develop a vaccine occurred in the late 1960s when it took four years to develop a vaccine for the mumps.

More than 68 million vaccine doses had been administrated in 56 countries by late January 2021.  The daily rate is approximately 3.4 million doses a day.  Israel is leading with 43% of their population vaccinated.  America has given out 23.5 million doses, 7.1% of their population. 

A World Health Organisation linked plan is in place to administer 2 billion vaccine doses globally in the first half of 2021. Expectations are for large portions of the population to be vaccinated by the middle of 2021. 

Goldman Sachs forecast: The UK is expected to vaccinate 50% of its population by the end of March, with the US and Canada following in April. The EU, Japan, and Australia reach the 50% threshold in May.

These targets are likely given the expected ramping up of vaccine production over the months ahead and despite a slower start to the vaccine roll out than expected in some countries.

Albeit virus cases and deaths have reached new records and new variants of the virus have emerged in the UK, Ireland, and South Africa.  This wave of infections across the world, particularly in Europe and the UK, has resulted in renewed lockdowns and ongoing restrictions on activities.

As a result, global economic activity is expected to be weaker over the last quarter of 2020, after a strong rebound in the third quarter of last year. This weakness is expected to flow over into the New Year, 2021, given the above and that it has been a harsh northern winter. This is reflected in recent economic data. For example, the US economy expanded at a 4% annualised rate in the fourth quarter of 2020, which was below expectations and down from the record 33.4% annualised rate in the previous three months.

However, once the vaccine rollout gathers speed the reopening of economies will accelerate around the world.

Democrats win Georgia Senate elections

The outlook for 2021 is positive and received a boost following the Democrats taking control of the US Senate by the slimmest of margins after winning both seats in the Georgia run-off elections held in early January.

President Biden has released his $1.9 trillion (over 8% of the economy) Covid-19 Relief package, this is in addition to the $900 billion of spending approved by Congress in December.  The plan includes $1,400 in additional direct payments to individuals (raising cheques to $2000) and aid to small businesses. 

The relief package aims to provide economic support until the threat of the pandemic has receded.

There are political risks around getting the complete packaged passed in to law.  Albeit, a sizeable percentage of the package is likely to be passed into law, which will represent a sizable stimulus for the US economy.

The extra spending along with ultra-low interest rates argues well for the global and US economy. 

Interest rates are likely to remain low for some time.

US Federal Reserve Policy Position

The US Federal Reserve (Fed) will now seek to achieve average inflation of 2% over time.  Instead of targeting a 2% inflation rate, the Fed will allow higher inflation “for some time” to offset below 2% periods of inflation. 

They will also target “broad and inclusive employment”, where employment is placed ahead of inflation in terms of policy priority.

This is a dramatic change in policy and has implications for financial markets now and in the future.

The key short-term impact, interest rates in the US are expected to remain lower for longer.  Specifically, the Fed will likely keep the Feds Fund Rate at the currently level of 0.25% until after there has been a period of inflation above 2%.  And this is not likely to happen until late 2024 – early 2025.

Longer-term, the risks to containing inflation have increased.  Likewise, longer-term interest rates will likely drift upward in anticipation of higher inflation and as the Fed scales back on other areas of their Policy response, such as the buying of fixed income securities (tapering of Quantitative Easing Policy).

With regards to US inflation, core consumer prices have risen 1.6% over the last year in the USA.

Although inflation is expected to be well contained over the next few years, the risks of higher inflation in the future are mounting, particularly given the size of the government spending being undertaken in the US.

Although there might be some volatility in the inflation rate over 2021, reflecting the extreme disruption to the economy last year, core inflation is set to remain low given the level of spare capacity within the economy.  By way of example, as presented in the graph below, US unemployment remains high despite a breathtaking recovery over the second half of 2020. The US unemployment rate is currently 6.7%. This compares to 14.8% at the end of April 2020 and 3.5% at the beginning of the year.

Nevertheless, the global economic environment is transforming to a more reflationary phase. This compares to the deflationary environment that has dominated the global economy since 2008 and the Global Financial Crisis (GFC).

As outlined in this Kiwi Investor Blog Post, investors are well advised to consider preparing their portfolios for the potential of a higher inflation environment.

Economic Outlook

The global economy is poised to rebound strongly in 2021, primarily driven by the factors outlined above, vaccine roll out, ultra-low interest rates, and government spending measures.

For the first time in over 10 years, we are likely to see strong and synchronised global economic growth over the years ahead.

The consensus forecast for world economic growth in 2021 is just over 5%, and approximately 4.0% in 2022.  The global economy shrank 4.2% in 2020.

The V shape economic recovery is well on track around the world.

Given the Democrats win in Georgia as outlined above, economic growth forecasts for the US have been revised upwards recently on an expected increase in government spending. Consensus forecasts are for just over 4.0% growth in 2021, after a decline of 3.5% in 2020.

Many areas of the US economy are expected to perform well in 2021, including consumer spending, a rebound in capital expenditures, a strong housing market, and inventory rebuilding. Given above potential economic growth this year the level of unemployment should decline, reducing the slack in the US labour market.

The US economy has remained resilient in the face of the pandemic, with businesses learning to adapt to restrictions on activities.  There is little evidence of economic scaring that would have negative longer-term impacts on economic activity. 

This argues well for the US and risks to economic activity in 2021 could well be to the upside.

The Chinese economy rose 6.5% in the last quarter of 2020 from a year earlier.  A strong outcome to finish the year and resulted in the Chinese economy growing 2.5% last year, the only major economy to report positive economic growth for 2020.  Albeit this is the country’s weakest annual economic expansion since the late 1970s.

China is more advanced in its economic cycle post Covid relative to the rest of the world.  The rebound in the economy is being driven by industrial production, exports, retail sales, and investment into fixed assets.  Like the rest of the world, economic activity remains weak in tourist related industries, such as hotels and catering.

Around the rest of the world the Eurozone is expected to grow around 4.6% in 2021 after the sharp -7% contraction in 2020.  The UK economy, which suffered one of the sharpest declines in 2020, estimated to have contracted by -11.2%, is on track to rebound in 2021 with over 5% GDP growth. The Japanese economy is expected to grow by around 2.5% in 2021.

The New Zealand economy expanded a stronger than expected 14% in the third quarter of 2020.  This follows a historical 11% contraction in the second quarter.  The economy is 2.2% smaller compared to a year ago.  Construction and retail trade led the recovery following the second quarter lockdown.  Accordingly, there has been an improvement in business confidence.

Inflation in the final quarter of 2020 was 0.5%, which was stronger than expected.  Annual inflation was unchanged at 1.4%.  The quarterly result in part reflects strong demand in some areas (e.g. accommodation and air travel) due to pent up demand following lockdown, supply issues in other sectors, and rising prices for housing construction.

Some volatility in inflation data can be expected in the quarters ahead, and Central Banks, such as the Reserve Bank of New Zealand, will look through this volatility.

In relation to New Zealand, a strong rise in house prices over the last three months of 2020 has reduced the likelihood of negative cash rates. 

This turn of events has witnessed a steady appreciation of the New Zealand dollar (Kiwi) over the last quarter.  The Kiwi is currently trading at around 72 cents versus the US dollar, compared to 67 cents at the end of September (+6%), and is 18% higher compared to 60 cents at the end of April 2020.

Brief Market and Portfolio Positioning Comments

  • Global equities climbed over 17% in the December 2020 Quarter, to finish the year 16.9% higher than at the end of 2019.
  • The US sharemarket ended the year at historical highs.  The S&P500 returned 18.4% in 2020 and is over 70.0% higher from its yearly lows in late March.
  • The New Zealand sharemarket also finished the year strongly, rising 16.3% in the last quarter of the year, returning 14.7% in 2020.  This is the Index’s ninth consecutive year of positive returns.  The benchmark has more than quadrupled since the end of 2011, and more than doubled since 2015 (benchmark returns are based on S&P Dow Jones Index data).
  • The Australian sharemarket returned 13.7% over the last three months of 2020, eking out 1.4% for the year. 
  • Information Technology and Consumer Discretionary tended to be the better performing sections, Energy and Real Estate sectors the worst.
  • Growth factor outperformed Value by a wide margin in 2020, as is has for some time.  In the US, growth returned 33.5% and value 1.4% for the 12 months period.
  • Nevertheless, this hides a sharp reversal in market fortunes over the last quarter of 2020, in the US value returned 14.5% and growth 10.7%, enhanced value returned 24.6% for the period.
  • This reversal in market leadership has some legs and likely has further to run, given the economic backdrop outlined above.
  • Likewise, cyclicals and the energy sectors will benefit from stronger global growth and the releasing of pent-up demand as economies open-up following the roll out of the vaccine.
  • After 10-years of underperforming Development Markets, Emerging Markets are better placed to benefit from an increase in global manufacturing.  These markets recently reached historical highs; surpassing levels last seen in 2007.
  • Within portfolios duration should be reduced.
  • The ultra-low interest rate environment presents challenges for investors in the years ahead.  Over reliance on cash, fixed income, and equities to generate portfolio returns could lead to disappointing outcomes.  Investors should look to increasingly diversify outside of the traditional asset class.  This Post by Kiwi Investor Blog provides access to discussions on different portfolio investment strategies than could be considered in meeting the challenges ahead.

Global sharemarkets have performed strongly in recent months and are susceptible to a pull back. 

Given the economic backdrop outlined above, this would provide an opportunity to consider adding to equity positions.

Please read my Disclosure Statement


Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Coronavirus – Financial Planning Challenges

For those near retirement this year’s global pandemic has thrown up new challenges for them and their Financial Advisor.

Early retirement due to losing a job, the running down of emergency funds, and a low interest rate environment are new challenges facing those about to retire.

Events this year are likely to have significant repercussions for how individuals conduct their financial planning.  Specifically, how they approach spending and saving goals.

The pandemic will likely have lasting implications for how people think about creating their financial and investment plans, and therefore raises new challenges for the Advisors who assist them.

These are the key issues and conclusions outlined by Christine Benz, director of personal finance for Morningstar, in her article, What the Coronavirus Means for the Future of Financial Planning.

In relation to the key issues identified above, Benz writes “All of these trends have implications for the way households—and the advisors who assist them—manage their finances. While the COVID-19 crisis has brought these topics to the forefront, their importance is likely to persist post-pandemic as well.”

Although the article is US centric, there are some key learnings, which are covered below.

How the Pandemic Has Impacted Financial Planning for Emergencies

The Pandemic has highlighted the importance of emergency funds as part of a sound financial plan and the difficulties that many individuals and households face in amassing these “rainy-day funds.”

Lower income families are more at-risk during times of financial emergencies.  Research in the US found that only 23% of lower-income households had emergency funds sufficient to see them through three months of unemployment.  This rises to 52% for middle income households.

It is advisable to have emergency funds outside of super.

The Morningstar article highlights “Withdrawing from retirement accounts is suboptimal because those withdrawn funds can’t benefit from market appreciation—imagine, for example, the worker who liquidated stocks from a retirement account in late March 2020, only to miss the subsequent recovery.”

An emergency fund helps boost peace of mind and provides a buffer and the confidence to maintain longer-term retirement goals.

Financial Advisors can assist clients in setting saving goals to amass an emergency fund, which is specific to their employment situation, and how best to invest these funds so they are there for a rainy day.

From an industry and Policymaker perspective, and reflecting many households struggle to accumulate emergency reserves, Morningstar raised the prospect of “sidecar” funds as potentially part of the solution.

Sidecars “would be for employees to contribute aftertax dollars automatically to an emergency fund. Once cash builds up to the employee’s own target, he could direct future pretax contributions to long-term retirement savings. Automating these contributions through payroll deductions may make it easier for individuals to save than when they’re saving on a purely discretionary basis.”

The concept of sidecar funds has recently been discussed in New Zealand.

Financial Planning for Early Retirement

The prospect of premature retirement will pose an urgent challenge for some clients. 

Although those newly unemployed will consider looking for a new job some may also consider whether early retirement is an option.

The US experience, to date, has been that those workers 55 and older have been one of groups most impacted by job losses.

Morningstar highlight that early retirement is not always in an individual’s best interest, actually, working a few years longer than age 65 can be “hugely beneficial to the health of a retirement plan,”….

They note the following challenges in early retirement:

  • Lost opportunity of additional retirement fund contributions and potential for further compound returns; and
  • Earlier withdrawals could result in a lower withdrawal rate or reduce the probability the funds lasting through the retirement period. 

Financial Advisors can help clients understand the trade-offs associated with early retirement and the impacts on their financial plans.  Often the decision to retire is about more than money.

Individual circumstances in relation to access to benefits, pensions, health insurance, and tax need to be taken into consideration.  Given this, a tailored financial plan, including the modelling of retirement cashflows on a year-to-year basis would be of considerable value.

Accommodating Low Yields in a Financial Plan

The low interest rate (yield) environment is a challenge for all investors. 

Nevertheless, for those in retirement or nearing retirement is it a more immediate challenge.

Return expectations from fixed income securities (longer dated (maturity) securities) are very low.  Amongst the best predictor of future returns from longer dated fixed income securities, such as a 10-year Government Bonds, is the current yield.

In the US, the current yield on the US Government 10-year Treasury Bond is not much over 1%, in New Zealand the 10-Year Government Bond yields less than 1%.  Expected returns on higher quality corporate bonds are not that much more enticing.

As Morningstar note, “These low yields constrain the return potential of portfolios that have an allocation to bonds and cash, at least for the next decade.“

The low yield and return environment have implications as to the sustainability of investment portfolios to support clients throughout their retirement.

The impact of low interest rates on “withdrawal rates” is highlighted in the graph below, which was provided by Morningstar in a separate article, The Math for Retirement Income Keeps Getting Worse, Revisiting the 4% withdrawal rule

The 4% withdrawal rate equals the amount of capital that can be safely and sustainably withdrawn from a portfolio over time to provide as much retirement income as possible without exhausting savings.

For illustrative purposes, the Morningstar article compares a 100% fixed income portfolio from 2013 and 2020 to reflect the impact of changes in interest rates on the sustainability of investment portfolios assuming a 4% withdrawal rate. 

As Morningstar note, since 2013 investment conditions have changed dramatically. When they published a study in 2013 the 30-year Treasury yield was 3.61% and expected inflation was 2.32%. Investors therefore received a real expected payout of 1.29%.

When they refreshed the study in 2020, those figures are 1.42% and 1.76%, respectively.  This implies a negative expected return after inflation.

The graph below tracks the projected value of $1 million dollars invested in 2013 and 2020.  The prevailing 30-year Treasury yields for July 2013 and October 2020, as outlined above, are used to estimate income for each portfolio, respectively, over time.  A “real” 4% withdrawal rate is assumed i.e. the first years $40k withdrawal grows with the inflation rates outlined above.

As can be seen, the 2013 Portfolio lasts up to 30 years, the 2020 Portfolio only 24 years, highlighting the impact of lower interest rates on the sustainability of an investment portfolio.

Financial Advisors can help in determining the appropriate withdrawal rates from an investment portfolio and the trade-offs involved.  They may also be able to suggest different investment strategies to maintain a higher withdrawal rate and the risks associated with this.

This may also include the purchase of annuities, to manage longevity risk (the risk of running out of money in retirement) rather than from the perspective of boosting current portfolio income.

Morningstar suggests that new retirees “should be conservative on the withdrawal rate front, especially because the much-cited “4% guideline” for portfolio withdrawal rates is based on market history that has never featured the current combination of low yields and not-inexpensive equity valuations.”

The 4% withdrawal rate is an industry “rule of thumb”.  Further discussion on the sustainability of the 4% withdrawal rate can be found here.

I have posted extensively about the low expected return environment and the challenges this creates for the Traditional Portfolio of 60% Equities and 40% Fixed Income.

The following Post on what investors should consider doing in the current market environment may be of interest. This Post outlines some investment strategies which may help in maintaining a higher withdrawal rate from an investment portfolio.

Likewise, this Post on how greater customisation of the client’s invest solution is required and who would benefit most from targeted investment advice may also be of interest.

Lastly, Wealth covers Benz’ article in Retirement Planning in a Pandemic.

Please read my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

The case against US equities

Extremely high valuations at a time of overwhelming uncertainty sits at the core of the case against US equities.  The US equity market appears to be priced for a perfect outcome. 

For those that demand a margin of safety, there is very little safety margin right now in US equities.

GMO’s James Montier recently outlined the reasons not to be cheerful toward US equities. 

This contrasts with Goldman Sachs 10 reasons why the US equity market will move higher from here, which I covered in my last Post.

In the GMO article it is argued the US sharemarket is priced with too much certainty for a positive outcome.  Nevertheless, with so much uncertainty, such as shape of the economic recovery and effectiveness of efforts in containing further outbreaks of the coronavirus, investors should demand a margin of safety, “wriggle room for bad outcomes if you like”. 

The article concludes there is no margin of safety in the pricing of US stocks today.

In his view, “The U.S. stock market looks increasingly like the hapless Wile E. Coyote, running off the edge of a cliff in pursuit of the pesky Roadrunner but not yet realizing the ground beneath his feet had run out some time ago”.

This view in part reflects that GMO does not fully support the narrative that has primarily driven the recovery in the US stock market over recent months and is expected to provide further support.

The centre of the positive market outlook narrative is the US Federal Reserves’ (Fed) Quantitative Easing program (QE).  QE involves the buying of market securities, leading to an expansion of the Fed’s Balance Sheet.

In short, Montier thinks it is tricky to argue any direct linkage from the Fed’s balance sheet expansion programs to equities.  In previous Fed QE periods longer-term interest rates rose, which is not supportive of equities.  It is also observed, in other parts of the world where interest rates are low, equity markets are not trading on extreme valuations like in the US.

On this he concludes the “Fed-based explanations are at best ex post justifications for the performance of the stock market; at worst they are part of a dangerously incorrect narrative driving sentiment (and prices higher).” 

Further detail is provided below on why he is skeptical of positive market outlook narrative centred around ongoing support for the Fed’s policy.

The article concludes:

“Investing is always about making decisions while under a cloud of uncertainty. It is how one deals with the uncertainty that distinguishes the long-term value-based investors from the rest. Rather than acting as if the uncertainty doesn’t exist (the current fad), the value investor embraces it and demands a margin of safety to reflect the unknown. There is no margin of safety in the pricing of U.S. stocks today. Voltaire observed, “Doubt is not a pleasant condition, but certainty is absurd.” The U.S. stock market appears to be absurd.”

This view is consistent with a “long term value” based investor and has some validity.  From this perspective, the investment rationale provides a counterbalance to Goldman’s 10 reasons.

The counter argument to GMO’s interest rate view is that the fall in interest rates reflects higher private sector savings and easier monetary policy rather than pessimism about growth and corporate earnings.  Reflecting the expansionary polices of both governments and central banks corporate earnings will recover.  Although weaker, the temporary fall in corporate earnings are not in proportion to that implied by lower interest rates.  This means lower interest rates really do justify higher market valuations.

Also, the two contrasting views could be correct, the only difference being a matter of time.

Implementation of investment strategy is key at this juncture in the economic and market cycle, more so than at any time over the last 20 years.

Historical sharemarket movements and over valuation

Since reaching the lows of 23rd March 2020, the U.S. equity market has rallied almost 50% and other world markets nearly 40%.

The movements in markets have been historic from the perspective of both the speed and scale of the market declines and their rebound.

GMO provide the following graph to demonstrate how sharp the fall and rebound by comparing the Covid-19 decline to others in history, as outlined in the following graph they provide:

Source: Global Financial Data, GMO

The sharp rebound in markets has pushed the US markets back up to extreme valuation levels.

The article outlines the following observations:

  • In 1929 the U.S. market P/E was 37% above its long-term average, and earnings relative to 10-year earnings were 46% above their normal level
  • In 2000 the market P/E was 98% above its average, and earnings relative to 10-year average earnings were 37% above their normal level.

As displayed in the following graph provided, valuations are in the 95th percentile, “right up there in terms of one of the most expensive markets of all time”.

Source: Schiller, GMO

It is clear to see there is very little margin for safety with such high valuation levels set against an uncertainty economic environment.

Accommodative US Federal Reserve Policy

A portion of the GMO article addresses the notion that an expanding Fed Balance Sheet will continue to support US equities.  The notion being that QE lowers interest rates, reducing the discount rate, and therefore drives up stock markets.

James prefers to focus on fundamentals and therefore has several issues with this viewpoint:

  1. He is skeptical of a clear link between interest rates and equity valuations.  As noted, Japan and Europe both have exceptionally low interest rates, but their stock markets are not trading on extreme market valuation like the US.
  2. Interest rates are low because economic growth is low, this needs to be reflected in company valuations.  See the note below, Role of Interest Rates for a fuller explanation.
  3. QE hasn’t actually managed to lower interest rates.  As can be seen in the Graph below, all three of the completed cycles of QE have actually ended with interest rates higher than they were when the QE began.
Source: Global Financial Data, GMO

The graph also highlights how low US interest rates are!

A Note on the Role of Interest Rates

The following extract from the Article outlines James’ explanation as to the Role of Interest Rates:

“I am no longer unique in my questioning of the role of interest rates. The good people at AQR Capital released a paper in May 2020 entitled “Value and Interest Rates: Are Rates to Blame for Value’s Torments?” In it they say, “As the risk-free interest rate is one component of the discount rate, when interest rates go up, the discount rate increases and the asset price falls – if everything else stays constant. Hence, if expected cash flows are unchanged and if the risk premium associated with those cash flows is unchanged (where the risk premium is determined by both the amount of risk exposure the cash flows have and the price of aggregate risk to those exposures in the economy), then the formula tells us how prices will change when riskless interest rates change. However, in the case of stocks, these other components rarely stay constant. Changes in real or nominal interest rates are often accompanied by (or are often a response to) changes in expected inflation and/or changes in expected economic growth, and hence expected cashflows are often changing as well. There may also be a change in the required risk premium, which is the other (and often larger) component of the discount rate. All of these components have their own dynamics and are likely simultaneously being affected by macroeconomic conditions in possibly different ways.”

Please see my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

The case for owning equities – 10 reasons why the current bull market has further to run by Goldman Sachs

In what has been an extraordinary year, and despite a sharp bounce back from the sharemarket lows in March 2020, Goldman Sachs (GS) provides 10 strong reasons why they think US equity markets can continue to move higher from here.

GS issued their report earlier this week, 7th September 2020, after last week’s sharp declines. 

Quite rightly they highlight markets are currently susceptible to a pull back given their strong run since earlier in the year.  Nevertheless, over the longer term they think there are good reasons for them to move higher.

GS provide context in relation to the current market environment.

Firstly, the current global recession is unusual, not only to how sudden, sharp, and widespread the recession has been, also that it was not triggered by economic or market factors.  The recession was caused by government actions to restrict economic activity to contain the coronavirus.

Secondly, GS provides analysis as to the characteristics of the bear market (sharemarket fall of greater than 20%) earlier in the year.  They note it was characteristic of an “event driven” bear market (other types include structural and cyclical).  GS note that event driven bear markets typically experience falls of ~30% and are generally shorter in nature.  A sharp fall is often followed by a quick rebound.  They estimate that on average event driven bear markets take 9 months to reach their lows and fully recover within 15 months.  This compares to a structural bear market which take 3-4 years to reach their lows and around 10 years to recover.

See this Post for the history and comprehensive analysis of previous bear markets by Goldman Sachs: What too expect, navigating the current bear market.

GS also see lower returns than historically in the current investment cycle, this is expected across all asset classes.

Reasons why the current bull market has further to run

Goldman Sachs provide 10 reason why the current bull market has further to run.

Below I cover some of their reasons:

  • The market is in the first phase of a new investment cycle.  GS outline four phases of a cycle, hope, growth, optimism, and despair.  They see markets in the phase of hope, the first part of a new cycle.  2019 had the hallmarks of optimism.  The hope phase usually begins when economies are in recession as investors start to anticipate an economic recovery. 
  • The outlook for a vaccine has become more likely.  This is a positive for economic growth.  This combined with the expansionary policies by governments and central banks suggest economies will recover. 
  • The Policy environment is supportive for risk assets, including sharemarkets.
  • GS economists have recently revised up their economic forecasts.  This will likely lead to upward revisions to corporate earnings, which will help drive share prices higher.
  • Their proprietary analysis indicates there is a low level of risk for a new bear market, despite current high valuations.
  • Equities look attractive relative to other assets.  Dividend yields are attractive relative to government bonds and in GS’s view cheap relative to corporate debt, particularly those companies with strong balance sheets.
  • Although higher levels of inflation are not likely in the short/medium term, Equities offer a reasonable hedge to higher inflation expectations.
  • They see the technology sector continuing to dominate as the digital revolution continues to gather pace. They also note that many of the large tech stocks have high levels of cash and strong balance sheets. 

This article by the Financial News provides a good review of Goldman Sachs’ 10 reasons why the current bull market has further to run.

In my last Post I looked at the investment case for holding government bonds and fixed income which might be of interest.

Happy investing.

Please see my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

We will get through this – coronavirus

One of the better discussions available on the coronavirus is the CFA Institute interview between Laurence B. Siegel and Andrew “Drew” Senyei, MD.

The most important point to take away is the concluding remark “the advances in medical knowledge and molecular biology, especially in the last decade, and with the full focus of the world on this one challenge — we will get through this.”

The discussion is wide ranging and will help in providing clarity on several issues e.g. the importance of testing, how the virus impacts on the body, and the trade-off between preventing or slowing the spread of the disease at all costs versus the cost on the economy and people’s mental health, including what testing is required to get people back to work.


The interview begins by acknowledging that although our knowledge of the virus is increasing there is still lots to learn about it. It is evident that this coronavirus is different from previous coronaviruses.

One important unknown is how lethal it is. This relates to the case fatality rate (CFR). This is the number of people who die of the disease, expressed as a percentage of the number of people who have it.

As you may be aware, there are a number of problems in measuring this currently:

  • More testing is needed to know how many people who have had it, especially asymptomatic patients – tested positive for the virus but showed no symptoms.
  • The reporting of deaths has also been problematic, did they die because of the virus or was there an underlying ailment e.g. cancer or heart disease. The difference between died with and died from.

The best estimate currently is that the CFR of the coronavirus is higher than the flu, but it is unlikely to be as high as SARS.

Also, the CFR for the coronavirus is likely to fall as further testing is undertaken, this was the experience with SARS.

The experience on the cruise ship, The Diamond Princess, provides an insight into the likely CFR, and interestingly, over half those tested were asymptomatic. This is discussed in more detail in the article.

The issue of incomplete statistics is highlighted in comparing the outcomes between Italy and South Korea. This comes down to the level of testing and the variations in the way different countries are testing.

Social distancing is having a positive impact. Particularly from protecting the health care system. Ideally, we want “the density of new cases presenting in any geographic area at any given time to be as low as possible and over as long a time period as possible to prevent a surge on the health care system.”

There is a great discussion around the issues with testing. There are a lot of variables.  At the risk of sounding repetitive we need lots of testing, “We need to know how much of the disease is out there so we can have the health care resources and physicians to respond to that surge, where and if it occurs.”


Economic Trade-off

The latter half of the article covers the issue of the trade-off between preventing or slowing the spread of the disease at all costs versus the cost on the economy and people’s mental health.

The argument being, should we ease up relatively quickly on policies that discourage work and income and social interaction, otherwise we will severely injure the economic life.

Is there an optimum or balance between the two extremes?


Initially, given the unknows, erring on the side of caution would appear appropriate.

Nevertheless, there is an argument for considering “a rational middle ground and that is: We have to first understand if this is peaking. And remember when you look at new case rates, you’re actually lagging by two weeks.”

Understanding more about the virus will help in getting the economy back up and running.  More testing is needed.

“I would look at those [new case rates], and then at hospitalizations and intensive care utilization, and see if that’s peaking because that is the most pressing problem. Then I would look at the rates by population density and see where the wave is happening more locally and usher resources there.”

The discussion comes back to more but different testing, to get a better sense of who’s had the infection, who’s over it, and who’s protected at least for a while.

This is an interesting discussion and highlights a likely path to getting people back to work. .

The key is to identify those individuals already immune and not likely to get infected or infect others back to work.

Protecting the elderly is important, therefore it is suggested “to look at the density of the elderly and make sure resources are adequate for that particular region — not just equipment and supplies, but personnel.”

Senyei concludes “I would invest really heavily in the basic biology and in vaccine development which is two years out. I think you’re going to need a vaccine and you’ll probably need a new vaccine like you do for the flu every year. This virus will mutate.”

“Now all that takes money, time, and coordination — but people are working on it and I think, if we did that, we could sort of get back to the economy being an economy.”

As highlighted above, they conclude by acknowledging that we will get through this.


Stay safe and healthy.


Happy investing.

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