The shape of the recovery is causing some puzzlement amongst the investor fraternity.
Ten year treasury yields are not doing what many wanted them to. Commentators have become obsessed with inflation. Barely a day passes without forecasts of lasting or transitory inflation and speculation over when interest rates are set to rise. Treasury yields spiked to nearly 1.8% in February, which immediately triggered forecasts that they would go above 2% or even 3%.
One of my pet hates is hearing the word ‘normalisation’ when used in terms of interest rates – if, after 13 years since the global financial crisis of 2008 those waiting for rates to ‘normalise’ back to their normal quite frankly have not quite got to grips the new era.
And we feel much the same about rates as we do bond yields
It is difficult to see how rates can rise with any significance without severely disrupting the global real estate market which dwarfs the global equity markets in value, and a crash in one sector probably equals a crash in the other.
Such a crash would precipitate a dash to safety, most likely in the form of a dash to treasuries. So a path downwards in yield will probably need a market riot beforehand, but then we are getting used to the odd ‘that’ll never happen’ crisis scenario in recent years.
So how best to approach what comes next? Our view remains the same.
Overweight the future, underweight the past
I was asked by a journalist recently what I thought the portfolio of the future would look like.
It was a good question and I found myself looking back 25 years in order to try to answer.
The internet was a ‘theme’ to follow back then but it took a while to take shape. Microsoft was number seven in the S&P 500 in the year 2000 and sits at number two today, but not one other of the top ten constituents that year remains in 2021.
I have not checked, but I would guess that at least a couple of today’s top ten didn’t even exist 21 years ago.
The point being, in order to be a successful investor it pays to remain flexible, prepare to adapt to the conditions of the time and invest in what the world wants and needs as opposed to what it has wanted and needed in the past.
Twenty years ago a well-known fund manager, who no longer is one, was a strong advocate of holding tobacco stocks for the long term. Others saw the future inevitably including major oil and gas companies and high street banks.
After all, we would always need those wouldn’t we? The answer in 2000 was, of course we would.
21 years later, with a global financial crisis and a pandemic behind us, the world is shaping up to behave a little differently.
It is truly fascinating to wonder which companies will be in the top ten of the S&P 500 in 2042? We will not have heard of them yet, but surely, they are what today’s investors should be trying to invest in?
While, we do not know which companies will be dominant in a few years’ time, we know the pools in which we want to fish.
Twenty years ago we knew the internet was a thing, but we did not know the astonishing array of ‘add ons’ that it would throw up.
Artificial intelligence and robotics were found in science fiction films while state sponsored cyber attacks were more James Bond than real life. Not having to go to the shops and having everything delivered to your door was just a pipedream while driverless cars were beyond fanciful. Paddle Battle was the cutting edge of computer games while the cloud was where your head was if you thought that any of these were actually going to happen in your lifetime.
Yet here we are, and these are the themes that we invest in, usually through the passive vehicles of ETFs as in this way we invest in everything in the sector, ensuring that we capture the growth of tomorrow’s winning companies.
It can be a bumpy ride and there will be times as in February when the past catches up a bit. Overall though, our strategy of overweighting the future and underweighting the past will be one that we are happy to stick with.
Andy Merricks is co-manager of the 8AM Focussed Fund