The saying goes that time flies when you’re having fun. I always thought that this was true, until 2020 came along. We have just entered the last month of the third quarter and while it feels like just yesterday when I was starting to implement my 2020 New Year’s resolutions, the time to start thinking about 2021 is steadily approaching. In light of this, I would like to adjust this saying by changing it to, “Time flies when you’re having fun, unless you’re locked down, because then it flies even faster.”

With everything that’s happened in 2020, I thought it appropriate to discuss three topics that investors could consider with 2021 in mind. Most of these topics, whether due to good or bad reasons, are currently quite relevant to the environment we find ourselves in. To start us off, just a short recap on stock markets in 2020 so far:

• The MSCI All Country World Index (ACWI) was off to a good start in 2020, and by Valentine’s Day, love was in the air as the Index was trading positive by 3% (in US dollar terms) for 2020.
• COVID-19 broke out, the world went into “lockdown” and so did the growth on the Index. By 23 March 2020, not only did the Index give back its 3% growth, but also lost nearly a third of its value as at 31 December 2019.
• By June, the world slowly started to move out of “lockdown” and so did the negativity. As we started to prepare ourselves for a long and treacherous recovery, the ACWI moved into positive year-to-date territory at the beginning of August 2020; and
• by 18 August 2020, love was back in the air with the ACWI trading positively by 3% again for 2020 so far.

“WITH THE NASDAQ COMPOSITE INDEX, AS AT 21 AUGUST 2020, TRADING AT THE
HIGHEST HISTORICAL PRICE EARNINGS RATIO (P/E) SINCE JULY 2002, I THINK THAT THE INTERNATIONAL TECHNOLOGICAL SECTOR IS CURRENTLY OVERHEATED”

Did I forget something? Of course! Not everything is quite that positive. Out of the 46 available exchange traded funds (ETF), only 10 are trading in positive territory for 2020. In fact, by 21 August, all countries that didn’t yet trade in positive year-to date growth territory for 2020, had an average growth rate of -16% in US dollar terms so far this year. So why then doesn’t the man on the street’s portfolio look like the ACWI? Well, one possible answer can be found in one of the best performing markets, the USA. We all know that the S&P500 was without a doubt one of the best investments you could make in the last five years, but this year was exceptional.

By late July 2020, the S&P500 had already grown by more than 2% (in US dollar terms) for the 2020 calendar year. Over the same period (according to FactSet and Goldman Sachs Global Investment Research), the five largest companies in the Index, namely Amazon, Apple, Facebook, Google (Alphabet) and Microsoft showed an average of 35% growth. But as amazing as this sounds, the reality is that the remaining 495 companies listed on the S&P500, not unlike the rest of the world, are still trading in negative territory (-5%).

With the NASDAQ Composite Index, as at 21 August 2020, trading at the highest historical price earnings ratio (P/E) since July 2002, I think that the international technological sector is currently overheated, and I would like to focus investors’ attention on three other sectors that they could consider as alternative investment options.

There’s a lot of value hiding in value

I know that most investors have heard enough about this topic, but value shares’ underperformance is now truly moving into extreme levels. When we place the MSCI All Country World Value Index (VI) relative to the ACWI, you will see that since the end of 1995, the VI has only underperformed the ACWI by 1.5 standard deviations on two prior occasions – at the end of 1999, and then again in 2011 following the Great Recession of 2009. Following the 1999 occurrence, the VI grew by 6% for the following five years in an environment where the ACWI actually declined by 9%. And it happened again in 2011 when the VI grew by 45%, while the ACWI grew by only 29%. In other words, in both cases the VI outperformed the ACWI by 15% or more (in US Dollar terms). Now, “this time may be different”, but since the end of March 2020, the VI is yet again experiencing a 1.5 standard deviation underperformance.

Graph 1: MSCI AC World Value Index relative to the MSCI All Country World Index (Source: PSG Wealth Old Oak & Thomson Reuters)

Can gold still shine?

Aside from tech shares, gold definitely isn’t far behind when it comes to outstanding performances in 2020. But unlike tech shares, these mines are not trading at inflated valuations. Without repeating what I said in my article of 6 August titled, “A dollar driven rally”, it boils down to the fact that gold mines are literally busy coining money at the current higher gold price. Warren Buffett also got some surprising looks recently when he announced that Berkshire Hathaway has acquired a stake in a gold mine
(Barrick Gold). Even after the recent rally in gold mines worldwide, the 30 largest mines in the world are currently only trading at a one-year expected P/E of 16 times. Analysts worldwide share in Buffett’s sentiment, with Thomson Reuters consensus expecting a 12-month target growth of more than 40% in these 30 mines’ share prices.

Bank and financial stocks can’t both drop to zero

To add to gold shares discussed above, I find it interesting to see that it’s stories that stay the same, while only the lead characters change. For the three-year period between September 2012 and September 2015, the MSCI ACWI Select Gold Miners IMI Index declined by just short of 70% in US dollar terms. Many good reasons were provided as to why this situation would only get worse, and eventually lead to these mines’ bankruptcy. Either China’s demand would have dried up forever, or the US dollar would have strengthened forever. We also heard before that by 2020, gold mines would no longer exist and now I’m hearing more and more that banks and most financial- and insurance companies won’t exist by 2025.

This has caused the S&P Global 1200 Financial Index to decline by more than tree times below the average 10-year relative price standard deviation. This is something that hasn’t happened in the last 20 years.

Graph 2: S&P Global 1200 Financials Index relative to the MSCI All Country World Index (Source: PSG Wealth Old Oak & Thomson Reuters)

I would like to conclude by making it clear that these three investment ideas could be considered as alternative options, and that they will undoubtedly work best in combination with a well-diversified portfolio. Please feel free to speak to me, or your financial adviser about these options in more detail. I hope you have a wonderful spring, and that this economic winter has now passed.

Published by
SCHALK LOUW

Disclaimer:
This is not to be used as financial advice, and always consult with your financial advisor before making any decision regarding pension fund withdrawals or transfers. These tax implications are subject to change.