Spring blossoms to consider

Schalk Louw is a portfolio manager at PSG Wealth.
Schalk Louw is a portfolio manager at PSG Wealth.

As the economic winter that grips the globe settles, Schalk Louw argues for three alternative investment trends.

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 the time to start thinking about 2021 is steadily approaching. Considering 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.

Let’s recap 2020 so far. The (ACWI) was off to a good start in 2020, and by Valentine’s Day the index was trading positive by 3% (in US-dollar terms) for 2020.

Then Covid-19 broke out, the world went into lockdown, and so did the growth on the index. By 23 March 2020, the index not only gave back its 3% growth, but also lost nearly a third of its value compared with 31 December 2019. By June, the world slowly started to move out of lockdown. The ACWI moved into positive year-to-date territory at the beginning of August 2020. And then, by 18 August 2020, the ACWI traded positively by 3% again for the year-to-date.

Not everything is quite that positive. Out of the 46 available exchange-traded funds (ETFs), only 10 are trading in positive territory for 2020. In fact, by 21 August, all countries that weren’t yet trading in positive year-to-date growth territory for 2020, had an average growth rate of -16% in dollar terms so far this year. So why, then, don’t all portfolios look like the ACWI? One possible answer can be found in the US. We know that the S&P 500 was one of the best investments you could have made in the last five years, but this year was exceptional.

By late July 2020, the S&P 500 had already grown by more than 2% (in 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 – Amazon, Apple, Facebook, Alphabet (Google) and Microsoft – showed an average of 35% growth. The reality is that the remaining 495 companies listed on the S&P 500, 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-to-earnings ratio (P/E) since July 2002, I think 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

Value shares’ underperformance is now profoundly 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 2008 and 2009.

Following the 1999 occurrence, the VI grew by 6% for the following five years in an environment where the ACWI 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 percentage points or more (in 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.

Can gold still shine?

Aside from tech shares, gold isn’t far behind when it comes to outstanding performances in 2020. But unlike tech shares, these mines are not trading at inflated valuations. It boils down to the fact that gold mines are busy coining money at the current higher gold price.

Warren Buffett also got some surprising looks recently when he announced that Berkshire Hathaway had 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 now only trade at a one-year expected P/E of 16 times.

Analysts worldwide share 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

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 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 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 1 200 Financial Index to decline by more than three times below the average ten-year relative price standard deviation. This is something that hasn’t happened in the last 20 years.

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.

Read more
This article originally appeared in the 10 September edition of finweek. To read the full story, you can buy and download the magazine here.
finweek, september, finsep

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