5/8/2020 12:00:00 AM

A Message from Mike: Buoyant April


Applying old wisdom in 2020 

In China, the word crisis is a combination of two characters.
One represents danger, the other opportunity.

The English language origin of crisis comes from the Latinized form of the Greek word krisis, meaning “turning point in a disease.” Under either definition, a crisis is a critical time.

Looking at the origin of words is both helpful and insightful when it comes to assessing a situation. When you are looking for understanding or meaning, what better place to start than history. History gives us context. The ancient texts and languages can still teach us much about how to handle modern-day problems. With COVID-19 quite possibly the largest global crisis the world has faced since Fascism, Democracy and Communism locked horns in 1939, what from old wisdom can we apply to investing in May 2020?

If March was about danger and a stock market crash, April heralded in opportunity. Markets around the world rallied like lightning in reverse last month and at Pie we did our best to catch the favourable lift. This translated into the best month on record for most of our products, including a return of over 20% for Growth 2. But where does this leave us now? After all, isn’t this the worst economic contraction since the Great Depression? The bounce has left many investors scratching their heads as to how and why the rally occurred in the first place.

So now we find ourselves at the crisis; or turning point. On the positive, Governments and Central Banks have announced unprecedented levels of stimulus. And when I say unprecedented, I really mean unprecedented. In the US alone, stimulus accounts for over 50% of GDP either enacted or pledged. The US Federal Reserve balance sheet has grown from around US$4T at the start of March to US$6.65T today, as the Fed has turned up and provided liquidity at just about every auction in town. In many US states, the unemployment job keeper package now significantly exceeds the minimum wage. The home of capitalism has certainly signalled they will do whatever it takes to continue their consumer-led economy. And they are not alone, just about every country in the world has some sort of package in place. In answer to my earlier question, is this the worst economic contraction since 1930? Undoubtedly, yes. But it has also delivered the greatest response in history, which is why markets have rallied. Of course, somebody has to pay for this. But that is a problem for another day. The bulls hope enough has been done to kick-start the global economy, interest rates are zero, there’s oodles of cash on the side-lines (private equity reportedly has US$1.5T), and we’ve passed the worst economic point, being the April lockdown. Buy the dips they say.

In the negative corner, markets have now rallied back a long way, although not if you are a European investor, with most indices in that region still firmly in bear territory (-20%). Therefore the bears now believe all good news from the stimulus packages are in the market price. This has been a rally they’ve hated. What’s left is a damaged landscape full of uncertainty and unknowns. They say, how many jobs have been lost, how will consumers behave in three months, will I ever fly again, when will there be a vaccine, what’s going to happen to commercial property values and when can I start using Tinder again…?

Usually at this time the Bulls turn to Buffett, but not this crisis. It’s been a case of “Where’s Warren?” these past few months, with the usually outspoken oracle of Omaha lying low. We found out over the weekend why. Buffett’s portfolio of largely old-world economy companies have taken a beating, from banks to insurance, to railroads, to retailers to, yes, airlines. These businesses are not what they used to be, and Warren has not encountered this situation before in his career. Some of these old-world industries will shrink and change for good in the digital age. In fact, Buffett exited all his Airline stocks in April and has vowed to never return. An ominous sign for those punting on the viability and recovery of Air NZ. I wouldn’t say Buffett was outright bearish in his outlook, still citing his long-term belief in the US economy, but he was hardly fist pumping USA. Berkshire has not deployed any of its cash pile. Perhaps it was the live-stream, perhaps it’s because he is now 89, but I felt he didn’t have the fight in him of days gone by. Sell the rallies the bears say.

It’s a strange old thing, status quo. Once it is interrupted, you forget very quickly what it felt like. The world entered a new decade on relatively stable economic and political ground compared to decades passed. No major conflicts, no humanitarian disasters and strong economies. In short, we had stability, prosperity and certainty. Four months later, and we are in the midst of a crisis that nobody was prepared for.

Whether the turning point is positive or negative from here (and I think Central Banks and Governments have already shown their hand), at Pie we believe we have entered a stock-picker’s market. It’s going to be a long road to recovery. For some it might be years, for others it might be never. Now more than ever, it’s important to back the right horse.

In summary, after enjoying a very buoyant April, we have still not deployed the cash cannon but instead continue to snipe away with stock picks. And if the facts change, I’ll change my mind. 

As always, thank you for your support. If you have any questions please don’t hesitate to call me on (09) 486 1701, or email me, [email protected]

Mike Taylor, Founder and CEO

Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser.