The 'K shaped recovery': Why you should invest in 2021
Here’s an opinion on 2021. Sharemarkets will keep rising, along with property prices worldwide. Going out on a limb, my view isn’t to simply ‘hold’ your current investments. It’s more aggressive; invest throughout 2021. Five years from now, I don’t believe there will be many regrets.
Do you know what the ‘K shaped recovery’ is? This little alphabet analogy applies to many parts of the world economy right now.
Look at the shape of the letter. Starting in the middle, one leg points down and one leg points up. It’s as simple as that. A market indicator can show contradictions within the data - strongly negative and charging ahead.
One-leg-up, one-leg-down scares investors. Do you risk buying shares? Do you risk a property purchase?
The K-ovid contradictions
The job-K: We have job losses, reduced hours, pay cuts and survival via wage subsidies (especially in international markets). Some see this as the cliff-edge. Demand could plummet, more firms could fold as subsidies are withdrawn and global sharemarkets would plunge. Yet we forget to analyse the employed. It’s all a bit impolite when others are suffering, but the vast majority are working and became super-savers during multiple lockdowns.
American savings rates shot up from 7 percent of income, to over 30 percent in April 2020. By year-end they were still sitting at double the historical average. The British are estimated to have paid $30 billion off their credit cards in just 7 months last year and savings rates were boosted from 6 percent of income in 2019 to as high as 26 percent in July 2020. The savings tsunami of the employed is a big counter factual to job losses.
The interest rate K: Long-term rates are rising as the markets sniff inflation, but governments worldwide are determined to keep short-term rates down to inspire growth and stop businesses struggling. One end of the curve appears to be free to respond. The other end is under Central Bank shackles.
QE-K: Quantitative Easing. Central Banks globally have flooded their economies with liquidity by buying back government bonds with new electronic cash. Bond investors are left needing to buy something new with the money. The asset price boom in shares and property is no surprise. After the 2008 crisis, the US was engaged in QE until October 2014, fueling asset prices. QE creates the most contradictory K of all – rising share prices, when company earnings are flat or falling due to the covid interruption.
Stimulus-K: Worldwide wage subsidies, cash-drops and stimulus packages in the US and Europe in the trillions, mean global sharemarkets are practically underwritten. In order to support those who are hurting, there’s the roll-on effect of inflating the wealth of those who own assets.
As a personal view this could continue for some time to come. Why? Because every government has come to the point of no return. They’ve borrowed, eased and made social decisions. Creating post vaccine confidence, growth, spending and jobs is the only way to pay off the cost of the pandemic. Why would any government think that mass company failure is a better idea? It will only stall the tax-take.
With every down there’s an up
For every cautious-hawk who quite rightly sees an inflated property or sharemarket bubble, we currently have a line of global government bazookas pointed at the markets, full of more money and underpinning jobs. Is it a bubble? Or is it the inevitable delivery of inflation in a different form?
Look back in history. If you bought a house back in 1970 for $7000 and sold it in 1985 for $70,000 (that’s a real life example), did it turn out to be a property bubble or do we now call it hefty inflation? While New Zealand has some specific local issues, we also have a global wind blowing on all asset prices, not just one funnelling through Cook Strait.
Why would anyone sell out of shares or property right now? Despite all the contradictions out there, 2021/2022 don’t appear to be years when you’d bet against the vaccine and every government in the world.
Investors need to take care
Volatility makes a fool of us all, so you’ll need some tight elastic in your pants and a brave face. Good fund managers will find their opportunities and active management could shine over passive. Stock pickers are likely to provide a smoother result than index funds, by avoiding the pitfalls the index can’t dodge.
What the bazooka masks is the quality of a company. That part will unravel with time. Good fund managers will sift out those being propped up.
If there was ever a time for taking financial advice, now is the hour. Keep up your contributions, but this is a year to invest outside KiwiSaver and ensure you are highly diversified across different managers, local and international markets. If you can name what you own, you don’t own enough.
Janine Starks is the author of www.moneytips.nz and can be contacted at moneytips.nz@gmail.com. She is a financial commentator with expertise in banking, personal finance and funds management. Opinions are a personal view and general in nature. They are not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.