Rudi's View | Nov 26 2020
Dear time-constraint investor: A shift is happening in financial markets as year-end approaches
In this week's Weekly Insights:
-Same But Different, Different But The Same
-Question Of The Week (on All-Weathers)
By Rudi Filapek-Vandyck, Editor
Same But Different, Different But The Same
Earlier this year I wrote a story titled "The Bear Market That Changes The World". In it, I predicted further unprecedented central bank market support measures and interventions, as well as governments joining in on the act through accumulating a heavy load of additional debt.
As we all know today, those forecasts have proven accurate and as the story title suggests, it will be incredibly difficult, if not nigh impossible, to wind back the enormous mountain of debt that has been built to fight off the economic consequences from this year's global pandemic.
And this story is not over yet. Global debt is still rising, and it will continue rising as governments cannot escape the cold reality that businesses that stop operating no longer pay tax, no longer keep people in jobs and they certainly won't be making any investments needed to lift the economic recovery onto a sustainable trajectory.
Last week the Institute of International Finance reported global debt has surged by over US$15trn since 2019, reaching a new all-time record high of US$272trn-plus during the September quarter of 2020, projected to grow further to US$277trn by year-end, equal to 365% of global GDP.
Anyone who still thinks governments will finally come up with a credible path towards reducing this historic mountain of public and private debt is seriously deluding him/herself. When you're this deep down into the rabbit hole, there simply is no way back. The Rubicon has now well and truly been crossed.
How exactly this scenario plays out over the decades ahead, I don't think anyone genuinely knows, but I can confidently make one prediction: we all have to get used to the fact that debt, in its broadest concept possible, is now an integral and crucial part of governments, businesses and households for the times that lay ahead.
And the more time passes by, the more the world is changing. In a sense, that title I chose in March is misleading. This year's pandemic and societal lockdowns have not changed the world per se; they have made sure that running trends, such as accumulating debt and extreme central bank policies, have now become irreversible.
There are many more ways in which the world is changing, and has been post-GFC, including the inner dynamics of financial markets. Negative real interest rates and government bond yields are forcing investors big and small higher up the risk ladder while the rise of passive investing, predominantly through Exchange Traded Funds, or ETFs, is equally unstoppable.
It's not easy to establish by how much both phenomena have impacted on prices and relative valuations for financial assets, but the impact itself is undeniable. Consider, for example, the market for global government bonds has traditionally been significantly larger than the size of global equities, but that gap between the two asset classes has been shrinking rapidly in recent years.
At the current pace, it is not inconceivable most of us will live through the moment that equities replace the once all-mighty bond market as the world's number one destination for superannuation and other investment funds. Will that shake things up a little? You bet it will!
Even in pre-GFC days, financial markets have always been influenced by the number and types of participants. 2020 has introduced a fresh group of share market enthusiasts: twenty- and thirty-somethings who not only helped create the fastest bear market recovery on record post-March, but who are equally contributing to the rise and rise of so-called "story-stocks".
Think Nio, China's equivalent of Tesla in the US, or, closer to home, Afterpay ((APT)).
It is not possible to determine who or what exactly influenced what and when, or how exactly. Such data are simply not available, let alone the context and insights necessary to obtain an accurate insight, but those expert voices who keep a firm eye on global liquidity might be looking into the right direction.
Investors need not look any further than recent price action in crypto currency Bitcoin which seemed to be bobbing along between US$9000 and US$12000 after having sold off in line with global equities in February and March. Since the beginning of October the price has -quite literally- exploded to the upside, by now having surged past US$18000. At the start of 2020, Bitcoin was languishing below US$8000 and only true believers seemed to still be interested.
Given its popularity among younger generations, Bitcoin's stellar come-back this year can be interpreted as the clearest sign those younger enthusiasts are making their mark. It can also be seen as the ultimate indicator for excess liquidity inside the global financial system.
Viewed from the latter's perspective, this month's stellar rise for Bitcoin bodes well for the Australian share market, and for risk assets in general. As the old adage goes: money first finds its way into financial assets before it is spent in the day-to-day economy, making the recovery happen that has been anticipated and priced-in first.
And Bitcoin, those eagle-eyed experts will assure all of us, has been preceding the next upswing for global equities on more than one occasion since its inception in 2008.
It may not necessarily be obvious to all and sundry, but general investor sentiment has made a dramatic turn in the past few weeks.
Having kept a finger on the pulse of the Sydney property markets myself, I have witnessed the change in general dynamics whereby, at first, everyone seemed convinced property prices looked vulnerable and destined for weaker prices in 2021, thus only high quality properties were finding willing buyers at reasonable prices.
Post the latest RBA rate cut, and the (unexpected) subsequent follow-through in banks' owner occupier mortgage rates, those hesitant tyre-kickers are now driven by FOMO. Properties that couldn't attract a decent offer only weeks ago, are now flying off the shelves at prices $100k-$200k above reserve, with multiple candidate buyers bidding against each other.
All of a sudden the buzzword in Sydney is: limited stock available.
In similar vein, two-three months ago the big debate among investors seemed to have returned to how "expensive" equity markets looked in light of historical comparisons and the many risks and uncertainties ahead. That too has quickly shifted into a "more risk is good"-type of mindset.