2020 Half Year Review

To merely say "these are challenging and complex times" seems an excessively simple comment for the size and multifaceted nature of the challenges ahead of us all. In this half-year review, I will try to summarize our views to help you navigate the way forward. As I write to you, the Corona virus has directly affected too many friends. Once you know someone who testifies how powerful and aggressive this virus can be, it makes you stop and reflect regardless of how many times you have read about it or heard of asymptomatic cases. One close family member or friend in hospital is infinitely more powerful than millions of nameless statistics from around the world. So, to all the readers who have had that direct impact, we share your anxiety and fear and send you all the strength we can.

Corona virus Update

The news here is indeed disturbing. The case numbers are increasing at an increasing rate and it feels like the hugely expensive lockdown was wasted. Stopping this virus through social distancing is no longer an option, if it ever was… On the positive side, when the virus broke in March there were maybe 10 possible medicines being developed – now there are over 265, with over 100 different solutions being developed in antibody, anti-viral and cell based therapies alone. In addition, 65% of the treatments are in second phase, so this is encouraging. However, it probably means that we are unlikely to get a silver bullet "one therapy solution". It will take time to develop, test, produce and roll out across the world. The data currently does not support the view that northern hemisphere summer has helped or that southern hemisphere winter has made it worse. Mostly, when the average age of a country's population is higher the mortality rate is higher. However, Japan is a notable exception to this with very high average age and very low mortality rate, which raises significant questions about this assumption and indicates there are other factors at work.

I have monitored the numbers very closely from the very beginning. The main lesson for me to share from many hours of virus trends analysis is that the numbers you see for the present hugely underestimate the full extent of the virus and are essentially "old news". It takes a few days to develop symptoms, schedule a test, and receive results, so there is a delay in the information. What is important is the trajectory and where will we be in 6/12/18 months' time. In my opinion, governments will not enforce another nationwide lock down. It is far too destructive economically and does not achieve anything sustainable. However, shorter localized shut downs of urban areas, schools, universities etc. will most likely occur. How governments deal with the challenge now that the virus is "out" is not something the market can predict.

2020 So Far

Most commentators agree that there has been a massive disconnect between the real world economies and the financial markets. It makes little sense that in the worst recession in decades the markets are so strong. To quote the famous economist John Keynes, "the markets can remain irrational a lot longer than an investor can remain solvent". The rational for the high markets do make sense from a monetary policy point of view. Low interest rates means investors need to take more risk for returns and need to hold assets that will protect them from inflation. In addition, the huge amounts of quantitative easing in the form of asset purchases and money creation simply means the money has to go somewhere. Philosophically, this just pushes the problem into the future and creates "financial repression". However, given the alternative of financial disaster this is the preferred result.

Major index results for the first 6 months of 2020

USA election

This is going to be a big one. Currently, the lackluster and tired looking Joe Biden is way ahead on the polls. The Economist say he has a 90% chance of beating Trump in November. In February, the picture was the opposite, however it seems Covid19 and the racial tensions may prove to be the undoing of Trump. Many say he has not shown the American public the empathy they needed to get them through these crises. In addition, American public seems to be leaning left. A very important factor for moderates would be Biden's choice of running mate. Elizabeth Warren, California's Kamala Harris or Atlanta mayor, Keisha Bottoms, seem to be front-runners. Warren has articulated some strong socialist views and a wealth tax. No doubt, there will be lots of drama and mudslinging. From a market point of view, whoever wins is taking over during the worst recession in a hundred years: double-digit unemployment, an out of control virus, and enormous USA debt and budget deficit. Not to mention a more fragile and insecure world. We are hopeful that some common sense will prevail over the rhetoric, but it does mean the market risk is higher.

Economic Scenarios

• Best case – rapid easing of restrictions, industry and commerce muddle through and virus numbers dissipate
• Good case- same as above just a little slower.
• Middle case – same as above just even more slowly.
• Bad case - Second wave gets out of control. Staggered lockdowns, slower than expected return to normalization
• Worst case – well, let us not even go there, but I am sure you can imagine…

According to traditional forecasting technique, you assign a probability to each scenario and then come up with a weighted average prediction. Given the severe possible consequences of the worst-case scenario, I am not convinced this will be useful information. I believe we need to take a balanced view knowing the risks. It all boils down to getting control of the virus, which is not an economic or financial consideration. Our assumption is that if the virus scenarios are on the negative side, then the USA and European government support will be increased in the form of money creation and direct support. Other weaker countries that do not have the economic firepower of the giants may be in for a terrible time, under that scenario. At least this view gives us comfort to continue to be invested in some risk assets, and we firmly hold the view that we do not have a financial systemic risk. Therefore, our recommendation to investors is to be realistic, patient and cautious.

Investment Opportunities?

If you watch our webinars (on our Facebook page or YouTube channel), you saw we have promoted several ideas which include sticking to a cautious version of your long-term plans and including some specialist funds and structured notes. I personally am a big fan of index linked structured notes but I do respect that the complexity is not for all investors. We do believe China will emerge stronger rather than weaker and therefore have allocated some risk there. As for new property investment, we are suggesting patience unless the individual property is compelling from a trusted provider. There is a time lag in property deal information, so we need to see the Corona and recession reflected in the numbers. We still feel that corporate bonds offer value, especially compared to cash, and the riskier spectrum of bonds offer an attractive return relative to the risk. In the space of riskier bonds, we prefer the subordinated credit to high yield and emerging market.

Israel at a glance

The Israeli economy has been hit hard. Most concerning are the high levels of unemployment and the resulting squeeze on consumer spending, which is not yet reflected in corporate numbers. My colleague at Pioneer, Shmuel Ben Arie, was quoted in the Israeli press being critical of the support level provided by the Bank of Israel, which resulted in the Bank reaching out directly to him to engage in a debate. Shmuel held his ground against the pressure from the government entity. Time will tell who is more correct. We believe Israel has been helping its citizens less than other developed market economies, but this might turn out to be better in the end. In our view, the Shekel is surprisingly strong and it is difficult to justify at levels stronger than 3.5:$1.

One can be philosophical about how quickly the world has changed and how vulnerable we are, however that will not help when it comes to practical investment steps. We remain constructively optimistic for the long-term but have no doubt that the short-term will challenge all of us.

The aforementioned information is not a substitute for personal Investment marketing, which takes into account the particular circumstances and special needs of each person. The views expressed in this Review should be considered as market comment for the short term for information purposes only. As such the views herein may be subject to frequent change, are indicative only and no reliance should be placed thereon. This Review does not constitute legal, tax or accounting advice, or any investment recommendation, or any offer to buy or sell financial instruments of any kind, and does not take into account the investment objectives or needs of specific investors. Although this Review has been produced with all reasonable care, based on sources believed to be reliable, reflecting opinions at the time of its writing and subject to change at any time without prior notice, neither Pioneer Wealth Management nor any other entity or segment within the Pioneer International Group makes any representations or warranties as to the accuracy or completeness hereof and accepts no liability for any loss or damage which may arise from its use. The writer and the company are unaware of any conflict of interest at the time of publishing the above commentary.