Can’t see the forest for the trees !
While we are still in the process of understanding the Covid-19 consequences on the economy, it is clear that the various economic sectors are suffering from heterogeneous financial impact. Energy, transportation (Airlines in particular) and tourism have all been affected. For their part, technology large caps are pulling the markets upwards. This is reflected in the widely dispersed market performances since the beginning of the year. Looking at the S&P500 sectors, the result for Energy is at -40% whereas Information Technology at +20%. The second-quarter earnings season, which started last week, could further accentuate the recently observed sectorial trends.
To illustrate these distortions, let’s take the example of GAFAMs* which together currently accounts for no less than 6,500 billion in market capitalization, i.e. as much as the S&P500 market cap in 2009! As a result, the reading of the main indices is biased. This significant technology weighting masks and absorbs the other sectors poor performances.
In response to the economic crisis, central banks have stepped up their expansionary policies and continued to provide ample liquidity to markets. Nevertheless, this policy may not have the desired effects. Current uncertainties and various constraints are slowing consumption. Many economic players, especially the developed country middle classes, are left with a surplus of fiat money that they are turning into savings. To illustrate, the savings rate was negative in the United States until 2008, which gradually increased, reaching nearly 8% in January 2020. In recent months, it has averaged 25%, its which is the highest level it has ever been! In Europe, it has risen from 12.7% in 2019 to more than 20% during the first half of the year…
The underlying risk is that the acceleration of expansionary policy will lead to a potential rejection of fiat currencies (dollar, euro, etc.) which could result in a lack of confidence in excessive money supply. Government can’t afford paralyzing the economy again and continue to injecting more liquidity. Therefore we believe that a second lockdown is unlikely.
In this environment, the search for defensive investments as an alternative to cash represents a challenge. A diversified portfolio, which is adapted to client risk/return might constitute an interesting alternative. In such an uncertain volatile context, precious metals, although less defensive, should offer greater resistance than other asset classes.
*GAFAM: Google, Amazon, Facebook, Apple, Microsoft