2020: Mid Year Review
Six months to forget and remember — this is an investing and economic analysis of the year so far.
I can’t believe we’re already half way through the year! What a wild ride we’re all on and I have to say; I hope you’re doing okay. The modern media machine has been relentless in bombarding us with messages of chaos and tragedy over these past six months. The limited silver linings are that finally the world is uniting and pulling together, and that there’s hope we might be seeing real change for a sustainable future and shared prosperity.
The capital markets (money) has been flowing to investment in technology and a particular focus has been technology that’s enabling people to live and work on their own terms. Capital flows have also been a positive beacon for future productivity as these invesmtent into technology enable businesses to maximise their workers productivity regardless of where the worker is located. The last six months has continued to show huge growth in sustainable and environmental technology, as well as a big push towards a more equal society. The big fund managers and philanthropists are looking to create more opportunities for more people and for these opportunities to be powered by new technology and social awareness.
All that being said, we are now at the mid-year mark, so the half-time report is due. This years’ report should simply state: it hasn’t gone to plan! It’s been irrational, uncertain, unpredictable and totally chaotic. It’s a year that will be remembered for a long time to come and was completely unprecedented.
In this year’s half-time report there’ll be a brief review of the start of year forecast, a review of stock performance, brief economic commentary and some extra analysis.
Review
At the start of the year I could never have imagined that the world would rush towards the apocalypse. However, I did warn that something was in the air, that the conditions were ripe for a big event, a crisis, or catastrophe and that people should be positioning their investments defensively.
“Although 2020 will be a year of catalysts there’s also a general feeling of waiting. Waiting for something to happen. Sure, there’s a potential end to Brexit, Hong Kong might calm down, and the U.S. has one of it’s most divisive elections in history but we seem to be waiting for something to spark the fuse. A natural catastrophe, a political crises, an economic crises or a great fiscal expansion. It’s impossible to say what it is, but there’s definitely a sense of anticipation.”
We now know what the events and catalysts were; and we correctly predicted a crisis — although I must admit, we could never have imagined it to unfold the way it has. The inevitable fuse has been lit in the U.S.. The ride to the end of the year looks like it’ll get bumpier as the election creates an environment primed for incendiary behaviour.
The fact that there was a high probability of a large downturn was about all we got right in the start of year forecast. There were a few minor other things but realistically, the majority of the predictions turned out to be flat out wrong. No-one can predict the future, but we can do our best to try and spot the Grim in the tea leaves.
Economics
The 20th Century was the American century. The stars and stripes guided the world out of two major wars and into the vast opportunities of a consumer driven economy. They were the leaders in thought, innovation, academia, technology, manufacturing, and had such dynamism that they were unstoppable. The people loved their freedom, their neighbours and they shared their prosperity and beliefs with the world. Unfortunately that freedom and opportunity has been progressively erroded over time. Big government, excessive regulation, monopolistic behaviour and popular politics have driven huge divisions in equality. Inequality has reached nearly every corner of modern America and it has turned opportunity into anger. The have’s versus the have not’s.
This divide could get even worse as jobs lost generally take longer to be put back on. History shows us that crises such as these generally result in 3–4% of the working population leaving the workforce entirely. They give up, they lose hope. This time might be different as there’s a social movement driving change. The next generation of leaders haven’t grown up with the same biases as their predecessors and they now have the technology and passion to make effectual change. Prejudices across the spectrum are being challenged and proven wrong. Seemingly small things like the ability to work from home are liberating and enabling swathes of parents and carers to be able to earn a living and care for their loved ones. We have to embrace this change, because if we can, then it’ll make us all more prosperous.
The crises of 2020 are pulling investment and development of productivity enhancing and sustainable technology from the future, to the present. Progress and time always march on, and we can choose to resist change or embrace it. Remote working, artificial intelligence, online commerce, domestic manufacturing and sustainable product innovation are the tools for more jobs and incomes in the future. If we can get as many people as possible into good jobs, with good incomes then we’ll improve our collective standards of living by more than any of us can imagine.
It’s all about the multiplier effect. As more people earn more money, they spend more, and create more jobs that continue the cycle. Individual prosperity creates shared prosperity. Unfortunately, 21st Century America needs to shift it’s view of shared prosperity.
Tell me; how can it be that Amazon generated $13.9 billion in income but only paid it’s first tax bill in three years at an effective tax rate of 1.2% ?
Now, I personally don’t think that taxes are the most effective form of wealth distribution. I believe in good wages for good work. Yet, the huge wealth only a handful of people are amassing is clear evidence that the system is broken. The job creator, the business owner, deserves to be rewarded for taking on the risks and for creating jobs. But employees should still be rewarded for making it happen, for executing the vision and dream, for putting in the hard work.
It’s this failing model of capitalism in America that is shifting the economic, social and political landscape. It’s pushing the world away from America and pulling America into chaos. The 20th Century was the American century, but Lady Liberty’s reign looks to be at an end.
I have no doubt that America will still be a place of economic dynamism and major international companies will operate and list their stocks on U.S. exchanges, but the majority of those company’s income will be from other parts of the globe. I expect that we’ll see the return individual nations as regional influencers and a return of sovereignty.
The key economic components of the second half of the year are:
- Mortgage defaults: will the banks convert those on payment holidays into late payers and defaulters?
- Job gains: will jobs return at a decent pace or will huge competition mean a big drop in wages?
- Home values: Home prices could face steep falls as defaults rise or wages fall.
- Politics: outrageous statements, poor handling of sensitive issues and international hot politics could create some scary moments. A huge U.S. election that could erupt in more civic chaos, trade wars and virus transmissions.
- China: countries such as Australia continue to play hard ball with the PRC but they overestimate their own bargaining power. The reliance on Chinese consumption, tourism, students and manufacturing puts them in a difficult situation. COVID should teach everyone a lesson about the importance of domestic manufacturing but that takes decades not months to develop. *could be some opportunities in this if politicians don’t shoot us all in the foot*
Investing
The stock picks at the start of the year have proved to be resilient. I’m happy with the defensive positioning and the use of behavioural portfolio theory. The stocks selected performed well as a basket and achieved a stable -0.81% which compares to the ASX 200's -12.59%, the S&P 500's -6.64% and the Dow Jones Industrial Average’s -11.30%. Looks like we truly outperformed given the conditions.
I personally would’ve swapped from Rio Tinto (RIO) to Fortescue Metals Group (FMG) due to the large stock purchases of the FMG Chairman and the political hot water RIO found themselves in over comments from their CEO and their actions involving indigenous sites. That being said, we’ll run with them for the year as that’s what we called.
I’d be looking to add to the portfolio at the mid-year mark and put in ATVI, XTE, ANZ and APX. ATVI is Activision Blizzard, a gaming company with a great portfolio of products and making a push into e-sports. The lockdowns and protests will cause more people to spend times indoors and engrossed in games so I think this has some great scope for growth. XTEK (XTE) is a manufactured and provider of protective equipment for the military and police. I’d expect a strong pipeline of demand for their products following the civil unrest in America and the growing international political tensions. Lastly I’d be looking to add ANZ Bank (ANZ) which I believe is one of the best run banks and managed by a strong risk manager in Shayne Elliot. The mortgage book appears to be quiet risk averse and despite not having the same growth runway as it’s competitors it has the risk management to weather a storm. Appen (APX) is SaaS business that offers artificial intelligence for language, image, video and audio processing. It has the power of a 1m+ community of ‘crowd employees’ that classify data and feed into training data for machine deep learning. There’s an expected compund growth rate of 36% p.a. into AI over the next five years and Appen is taking a large foothold in the market. It needs to revise it’s pricing model and grow it’s client base so it isn’t dependent on just a few major companies but it’s incredibly promising.
Other Analysis
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Consumer Trends
Consumers have remained resilient in Australia and I put this down to two core events. (1) boredom shopping —stuck at home and shopping online, (2) government stimulus has resulted in more cash in the bank than wages.
These two factors are artificially propping up of some of the BNPL and banks and it’ll be interesting to see what happens to banks and insurers as the stimulus falls away.
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Social & Investing Trends
Social investing is going from strength to strength with e-Toro expanding internationally. Strawman is an Australian social platform which doesn’t yet facilitate trades but enables community valuations, engagement and model portfolios to be built and managed. Social investing and investing clubs are an area of growth as Millennials continue to be unable to access the housing market and have been absorbed in social platforms for most of their adult lives. This target market is also coming into a period in their lives where their wages should start to facilitate investing.
I’d also recommend checking out Exploding Topics as a tool for seeing what’s trending and interesting at the moment. It’s a great visual tool for broad understanding of social phenomena and trends. A handy investing tool.
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Up & Coming Company
I’m a big fan of Slyp which is a ‘smart receipts’ provider. It’s doing excellent work with retailers and the banks to provide electronic receipts to consumers. This doubles down on environmental tech and productivity tech. I’ll be really interested if this ever goes to IPO but in the mean time keep an eye out for it.
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New Article Series
I’m going to be commencing my MBA shortly and will be writing a series called MBA Notes. I hope you keep a lookout for it and give it a read. My aim is to give exposure to the process and journey of an MBA while passing on knowledge and assisting those considering studying.
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If you have any questions then please feel free to comment, and if there is anything you’d like to see analysis on or read about in the future then let me know.
Also, please note that this article does not represent financial advice or the views of any organization; it is only the opinion and analysis of the writer.
Thank you for reading.
Yours,
Chris Leeson
