Weekly Roundup, 7th September 2020

Weekly Roundup, 7th September 2020

We begin today’s Weekly Roundup in the FT with John Redwood, who was wondering whether the markets would miss Trump.


John Redwood

In his regular update on the ETF portfolio he runs for the FT, John Redwood wondered whether the markets are going to miss Trump.

  • His tax cuts and promotion of jobs and growth have been popular with investors.

And last week’s crash notwithstanding, the US market has done well since he took charge.

  • But it looks like Biden will win the election, barring a vaccine and/or an economic recovery by November.

Biden will raise corporate and personal taxes, which will be bad for shares.

  • He also supports the green revolution, which will hurt oil and gas.

John has made no adjustments to the portfolio as yet but is monitoring developments.

  • He remains out of Europe because of slow growth, virus policies which have damaged local economies and a lack of tech firms to exploit the new normal.

But John does expect a recovery in traditional sectors eventually:

There will be some fast rates of profits growth with the return of some dividends in those sectors and geographical areas most damaged by the virus recession. The companies that survive in badly damaged sectors may emerge in a stronger position in due course.

And a Biden presidency could help Europe, with taxes on the digital giants and common cause in ESG.

Redwood fund 200828

Monetary policy

Joachim Klement

Joachim Klement provided some evidence that monetary policy has become completely ineffective.

  • A new study looked at investors’ willingness to borrow (and increase their risk) in a negative rate environment.

Participants were randomly assigned to groups with different starting rates.

  • They allocated their borrowings to either risk-free cash savings, a medium-risk bond or a high-risk stock.

Before a second round, they were told that the central bank had lowered interest rates by 1%.

Leverage and interest rates

In a world of positive interest rates, lower rates increase the demand for loans. In a world of zero and negative interest rates, they don’t.

The interest rate regime also affected asset allocation.

Asset allocation and policy rates

In positive territory, lower rates mean a higher allocation to stocks and bonds.

  • In negative territory, the allocation to bonds goes down and cash stays flat.

Joachim draws a parallel with Japan:

Despite zero interest rates, Japanese households and businesses have an extremely high cash quota in their savings and have been reluctant to take out loans. Could it be that we are heading down the same road?

Private equity

Buttonwood wondered whether private equity’s numbers can be trusted.

  • The SEC in the US has just widened the qualifications for “accredited investors” who can invest in the asset class to include some retail investors.

Here in the UK, there are many listed Merryn Somerset Webb

In the FT, Merryn Somerset Webb picked up on the theme of later IPOs, contrasting Amazon and the Hut Group.

  • Amazon raised $50M in 1997 when the company was three years old.

The Hut Group is fourteen years old and is raising $1 bn.

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