value and opportunity

It has been almost one month since my last panic journal post and a lot has happened in between. The stock market has roared back like crazy and everyone seems to ask themselves when they look at YTD charts and compare it with unemployment numbers and GDP “growth”: What the hell is going on ? Is this the next “Bubble” ? Are people crazy ?

Of course I can’t explain what is going on either but at least from my perspective three main topics stand out that I did not expect to such an extend and seem to be fundamentally positive surprises compared to a worst case scenario:

1. Central banks and Governments have acted more quickly and more radical than anyone thought
2. The “Dance” after the “Hammer” so far looks a lot easier that envisaged
3. A vaccine might come earlier than initially expected

1. Central banks and Governments

A few observations from my side that caught at least me by surprise, mostly Government actions on top of the already significant efforts from Central banks:

• In the US, most of the people who registered as unemployed are getting significantly more in unemployment benefits than what they earned before the crises
• The German Government just added another 130 bn program including VAT reduction and direct transfers on top of the basically unlimited credit guarantees and salary compensation scheme
• The EU is close to create a huge 750 bn EUR “recovery program” including direct transfers to the poorer “Club Med” countries with Italy as a main beneficiary

Would anyone thought that as an unemployed person in the US, you would do better than actually working ? That rather sounds like Sweden or Denmark. Would without the crisis (and with the UK) anyone have dared to bring up a Eurozone recovery program ? I don’t think so and this is maybe one of the examples where crisis suddenly change assumptions. I read some comments that mentioned that the Covid-19 crisis combined with the Brexit could actually the trigger for a “better” Eurozone in the future. If this would happen, this could be clearly a game changer.

There is clearly the question how sustainable all of this is, but in total, this has been a big push from the fiscal side which we didn’t see in the last two “crisis” scenarios (Dot.com and GFC). I think I have underestimated that Governments in general actually want to spend lots of money and with Covid-19 there is no real reason against it plus with “free debt” there is little impact on budgets for the near future.

2. “Easy Dancing”

In one of the previous post I had referenced to “The Hammer and the Dance”. Considering how for instance China, at least in the media, is running the “dance”. Many people were afraid that also we would to have to endure Chinese-style “disinfection tunnels”, constant surveillance through apps, temperature taking, video controlled quarantine  etc. etc.

So far however, things look quite relaxed. Germany has now opened many parts again since a few weeks. Austria, which has been ahead both in lock down and openings, has now already a 2 month history and new infections are at a very low level. And this without special measures with the exception of indoors face masks.

In Germany, there have been occasional “High profile “outbreaks such as in a baptist church, a restaurant “pre-opening party” or slaughterhouses, but the aggregate numbers are low. In my home town Munich with 1.5 mn inhabitants, the last week had two days with only 1 new person tested positive.

My own explanation for that rather easy “dance” is that at least what I can see is that people have changed their behavior significantly. Most people behave responsibly, keep the distance wear face masks and still avoid unnecessary trips. If a cycle through Munich downtown, my current estimate is that even after 2 weeks since all the shops reopened, foot traffic is maybe 1/3 of the old level and most restaurant are not even half full despite reduced capacity.  Also most large companies have only around 20% of their employees in their offices and most schools and kindergartens run on reduced capacity.

Still it is an encouraging sign that all the relaxations so far didn’t have any meaningful impact on infections and that based on current behavior patterns, the traditional measures such as phone based contact tracing etc. works quite well.

In the US, the situation seems to be a little different. The “hammer” doesn’t seem to have been so successful (the hit ratio tested and infected people is still surprisingly high at around 5%) , but for some reasons Americans seem to have in aggregate no problems with the comparably higher death toll and are eager to go back to business which in the end could lead to a relatively similar recovery path as in Asia and Europe.

3. Vaccine

To be honest, I cannot judge this at all, but more and more sources (China, US Government, German Minister of Interior) believe that a vaccine will be ready by year end. If that would be the case, I think it would be fair to expect a strong recovery in the world economy in 2021.

Summary:

So in my opinion, there are currently clearly some fundamental developments that seem to indicate that the strong and quick stock market recovery is based on a “better than expected” Covid-19 scenario at least for the developed world.

If the world economy roars back in 2021, there is indeed little reason that stocks should now be especially cheap and the spectacular increase in unemployment in the US will see a similar spectacular decrease going forward . The big question is of course, if all the assumptions hold.

If for instance a vaccine could not be found or at a significant later stage, I do think that especially vulnerable sectors like travel and hospitality would be hit really hard a second time.  Therefore I do think it makes sense to limit exposure to these sectors despite the availability of “bargains”.

However I have no idea how far the current rally could go and if there would be a problem, how deep the market could tank. I think Covid-19 showed again that market timing is both, extremely difficult and also potentially super stressful and should be avoided. Especially selling into a crash with the expectation of buying even cheaper in a couple of months has turned out to be a looser’s game the second time after the GFC. I have also observed that some people sitting on a lot of cash had not invested during the dark days and only started to invest again more recently after the recovery.

For me the lesson was to have hopefully improved the quality of my portfolio by kicking out a couple of stocks I wasn’t very happy with before (Electrica, Handelsbanken, Draeger, Hartmann) and replacing them with “stronger” companies that should do well in the long run (Sixt, Brenntag, Washtec, Richemont).

Looking back it would have been clearly better to buy more aggressively when things really looked bad, on the other hand I avoided to sell on a net basis which I would view as a success. Plus, my stress level was always relatively low as the portfolio did significantly better in the “dark days” than the market.

Interestingly, at the time of writing, my portfolio was already slightly positive for the year, which considering the big mistakes I made (Draeger, Coface etc.) is quite remarkable.