What are the big takeaways from a very strange year in the markets?
It has been more than a year now that COVID-19 has taken over the world. Many things have changed during this time and who knows what lies ahead, but clearly the rule book for investment management has been entirely re-written. So, with the benefit of hindsight, what are the key takeaways in a brave new world?
1. Equities are the only show in town. Yes, those wonderfully over-valued, technically stretched, and macro-economically utterly incomprehensible stalwarts of every wealth management portfolio have gone up more than anyone could ever have expected. Expectations are now that they shall never ever go down again, and the central banks will make sure they keep pumping enough money into the markets to make it so.
2. Bonds are not what they used to be. The free lunch just couldn’t last and making money whilst protecting our portfolios works no more. Yields are low in the short term and rising on the long end, inflation may come, and interest rates can only be manipulated for so long. No one in their right mind should have any of their money in things that make no money but come with huge risks.
3. The illiquidity premium is highly overrated. Yes, we used to be able to count on squeezing out a few extra basis points for tying up our money in complicated private deals or obscure structured products. However, when the chickens come home to roost and everyone heads to the door at the same time, the price for liquidity far exceeds any of the money we thought we may have made in the past.
4. Tech is back. For those of you that remember when we partied like it was 1999 and the Nasdaq went up 89%, the past 12 months must have seemed like the first act of an unwanted sequel. We all know what happened a few years later when Amazon lost 90%, but hey things are different now. Surely, we will all be watching Netflix on our Apple smart phone forever, whilst using that trusted Google browser to check Facebook at all times.
5. Commodities are a mixed bag. Gold has probably been the biggest disappointment of all, going down in March when we needed it most and going nowhere since even in the face of rising inflation. Oil went negative in April and is almost back to where it once was, whilst metals continue to defy gravity and lumber is up 400% from its lows. Go figure.
6. Hedge funds have struggled. It isn’t so much that we can blame those super smart masters of the universe for not being able to keep up with equities, but it is the scandals that have broken our hearts. With the prices of Ferraris being what they are, I suppose manipulating the performance numbers is all one can do, right Mr. James Velissaris?
Summing it all up, I suppose we should forget about diversification, put all of our money into Tesla (and Bitcoin as a function thereof), and hope for the best. Have I mentioned that the pubs are opening today in the UK, so what could possibly go wrong?