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Positives for 2021

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Positives for 2021

 

If Sleeping Beauty had been woken from her slumbers on New Year’s Day 2021, she would have been pleasantly surprised by the value of her global equity portfolio for however long she had been asleep.

 

Somewhat remarkably, over the past year, she would have been up for the year and blissfully unaware of the tragic pandemic that has tainted 2020 and caused such market ructions in March and April.  In fact, she would be wondering what the worry with investing was all about.  Take a look at the different outcomes that she might have experienced depending on how long she had been asleep for, in the table below.

 

Table 1: Sleeping Beauty’s slumbers – cumulative returns, after inflation to 30-12-2020

 

Time asleep1 year3 yrs5yrs10 yrs20 yrs30 yrs40 yrs50 yrs
Cum. return10%25%68%138%96%525%1,333%867%

 

Data: MSCI World Index in GBP adjusted for UK RPI. Morningstar Direct © Copyright 2021.  All rights reserved.

 

As investors, we should take a similar approach to looking at our assets, reminding ourselves that time and compounding are our friends.  Yet it is understandable that many investors still feel a bit nervous about the future, not least in the shorter-term with the recent literal assault on US democracy and the escalating pandemic.  Listening to the news can be depressing as well as somewhat repetitive.  Many of the more positive stories are often lost in the gloom.  Remember that it is always darkest just before dawn.

 

To redress the balance, here are five positive insights for 2021 and beyond:

 

First, and most obviously, the scientific community has done a remarkable job delivering the world with a suite of vaccines that provide a way out of the pandemic.  The UK has played a leading role, not only in vaccine development, but also identifying existing drugs that are, and will, have a major impact on treating patients including dexamethasone, tocilizumab and sarilumab (not easy to pronounce!).  A new double-blind trial is also underway in the UK looking at interferon beta, which initial indications show could dramatically reduce the risk of serious disease, which could – alongside the vaccines – be a game changer for managing Covid over time[1].  There is light at the end of the tunnel.

 

Second, we have learned many valuable lessons and built resilient processes and a logistics infrastructure for coping with any future pandemics, including bringing back or shortening critical supply chains for anti-biotics, PPE, vaccine manufacture, building community testing and delivering vaccine rollouts.  That has to be a good thing.  The pandemic also reveals how much we all need each other and what a powerful sense of community feels like.  How well would we fare without the people working in our local supermarkets or the lorry drivers and couriers keeping us supplied?  Or the hospital cleaners that expose themselves to the virus every day to keep others safe?  We will come out of this better prepared and hopefully more appreciative of the things we value such as family, friends, a round of golf, or a night at the cinema!

 

Third, with the pending inauguration of Mr Biden as President in the US, perhaps we will see a less bombastic approach to politics and the rebuilding of trust between democratic friends and allies that will help the free world to resolve some of the major issues that we face, not least how to manage relations with authoritarian states such as China and Russia.  Coming together is better than moving apart.

Fourth, perhaps we are at a positive inflection point in terms of social media, where something needs to change[2].  It is evident that those using social media, and the platforms themselves, have responsibilities that for too long have been blurred by the grey areas between free speech and hate speech and between being a technology platform and a publisher.  There is – post the storming of the US Capitol – a far greater sense that something urgently needs to be done.  In ten years’ time, we may well look back in disbelief at the wild west of the first 10 years of social media!

 

Fifth and finally, there appears to be an ever-increasing urgency to address climate change, with the UK at the forefront, not least with the presidency of COP26 in Glasgow later this year, and the government’s pledge to reduce carbon emissions by 68% of its 1990 levels by 2030.  In the past 10 years, the UK has reduced its carbon emissions by more than any similarly developed country[3].  It has also set a target for net-zero emissions by 2050 and pledged to ban the sale of new petrol and diesel cars by 2030. With the US reengaging, the momentum is shifting toward greater action, which also encompasses green finance and more sustainable investing.  That can only be a good thing.

 

Does all this mean that markets will rise in 2021?  The truthful answer is that no-one knows, not even the scientists!  But if we take a leaf out of Sleeping Beauty’s book, there is a pretty reasonable chance that the world will be in a better place in the not-too-distant future and when we look back – as an investor participating in the resilience, innovation and dynamism of the world – we will, most likely, be pleased with what we see.

 

If you have any questions, please don’t hesitate to contact Wells Gibson.

 

Risk Warnings

 

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

 

[1] https://www.bbc.co.uk/news/health-55639096

[2] For anyone who wants to understand how social media works and the dangers that it poses to individuals and society as a whole, we highly recommend watching ‘Social Dilemma’ which can be found on Netflix.

[3] https://www.gov.uk/government/news/uk-sets-ambitious-new-climate-target-ahead-of-un-summit

Why Gold is a Bad Investment

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I loved Spandau Ballet’s 1983 hit song, Gold, however Gold is a bit like the Marmite of the investing world; you either love it or you hate it.

For a minority of investors, often referred to as ‘gold bugs’, a bad word should never be spoken about this precious metal.  Their obsessive belief in gold as the ultimate investment is unshakeable. However, for most investors, investing in gold is a pretty bad idea and here are three reasons why.

Firstly, and arguably most importantly, gold isn’t really an investment.  It’s a commodity.  An investment is something that has an expected return and generates wealth so because gold doesn’t produce any income, it can’t be considered an investment in the same way as company shares, fixed income securities (bonds) or property.

As a commodity with no ability to generate wealth, gold fluctuates in value as a result of speculation over its future value.  It has limited supply, and opinions about the fluctuating future demand for gold is what prompts these changes in value.

Speculating is very different to investing.  It’s certainly a lot riskier.  

The second reason why gold is a bad investment is the difficulty you are likely to face trying to access this asset class in your portfolio.  When it comes to investing in gold, you really face two choices; buying physical gold or using an investment product designed to replicate changes in its value.

If you opt for owning physical gold, such as bars or coins, then you need to consider the (high) cost of buying and selling, along with the cost of storage and insurance.  It’s probably not a good idea to keep a load of gold bars in your safe at home, which means plumping for expensive storage facilities instead.

Investing via a digital product such as an Exchange Traded Commodity (ETC) comes with a different set of risks and considerations.  If the ETC in question uses derivatives to track the performance of an index, you introduce counterparty risk to the equation, which could see you losing money if one of the lenders involved in that index tracking process fails.

If your primary motivation for buying gold is to have a store of wealth in case of a disaster scenario, then owning it electronically (or having it stored in a remote vault) is going to do you little good should the world around you collapse.  In that scenario, the only gold with any real value is the gold in your pocket.

The third reason gold is a bad investment is because of a concept known as a crowded trade.  Whilst there is no precise definition of the crowded trade, it generally describes a situation where a large number of investors share a similar sentiment and there is a heavy presence of short-term investors. These short-term investors are ‘speculators’ rather than ‘investors’.  Those that invest in gold tend to be passionate about the investment, often lacking fundamental reasons for the allocation.  A crowded trade is therefore likely to amplify volatility and risk.

These three reasons for gold as a bad investment should be enough to deter most investors.

Another important factor to consider is inadvertent overexposure to gold as a result of existing indirect allocation via mining shares in UK equity portfolios.  Basic resources make up a little more than 8% of the FTSE 100 index of leading UK company shares, so it’s likely that within your investment portfolio you already enjoy some indirect exposure to gold.

There’s nothing inherently wrong with adding some gold to your investment portfolio.  Assuming you understand how this commodity behaves, and you don’t get carried away with too much allocation to gold, then it can help to dampen down volatility during times of turbulent equity markets.

However please try not to become a gold bug, convinced as they are that gold is the be all and end all of investing options.  

As Spandau Ballet sing in their hit song, True, ‘I know this much is true’!

For more information please don’t hesitate to contact Jonathan Gibson.