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Monthly Market Commentary - May 2021

20,21,2020…2021

MR. MARKET.

It is early June here in the south of Switzerland and it is a sunny day. For all the sports fans, we are going into an exciting summer. First of all, thanks to vaccine distributions (at least in the western world), we have a chance to get back to stadiums and watch sports live. Second, this week we will have the kickstart of a major sport event: the European football championship “Euro2020”. Wait a minute, 2020? Anybody noticed we are in 2021? I know you guys spent a lot of money in merchandising and inventories must be cleared but I find this 2020 labeling very very odd; unless… there is something deeper. Let’s find out. As a lover of history and math trivia I know well that humans played with the calendar since the ancient times. Mother nature gave us only two subdivisions of time 1) the orbital year, i.e. the time for the Earth to orbit around the Sun with its angular momentum and 2) the day, i.e. the time of a Earth’s spin. The only problem is that they do not match. The orbital year lasts 365 days, 6 hours, 9 minutes and 10 second. There is no way you can divide this period in units of days and be satisfied. During the Roman republic they had a year of 355 days. So, every four years the seasons would start one day later. In around 800 years the seasons would swap completely. Not a good solution. What did they do? They arbitrarily inserted a month between the nowadays equivalents of February and March to get things straight. It was only in 46 BC that Julius Caesar found a clever day to reduce the problem. He invented the leap year with an extra day every four years. To get things in order he also imposed that the year 46 BC should have been a little bit longer… so Romans had a year of 445 days. Exhausting as it may sound, Romans did survive and moved on. Still, the Julian calendar misses the orbital year by 9 minutes and 10 seconds. Not much but still a meaningful error in the time span of a civilization. Therefore, during the sixteen century, Aloysius Lilius was mandated by Pope Gregorius XIII to find a solution. He came out with a very smart idea. The so-called Gregorian calendar had leap years every four years, except for the years multiples of 100, leaving out the ones also multiples of 400. This is the calendar we use today. It gets to an estimate of 365.2425 days for the year, pretty close to the orbital one of 365.2422. Do you know what Pope Gregorius did? He ordered that his calendar was backdated (as if the Julius one did not exist at all). So, in 1582 the 4th of October was followed by the 18th. Just imagine if your birthday was between those days; no cake for you, mate. To make things worse, not all countries accepted the Pope’s imposition. England (and North America) followed only in 1752 when the 2nd of September was immediately followed by the 14th. Russia embraced the Gregorian calendar only in 1918. Buddhists and Muslims actually never did. Over time, a basic tenet of everyday’s life like the calendar got changed by political will and manipulated several times; entire days and weeks disappeared, and no-one really complained. Why then anyone should care of the “wrong” name of a sport event such as “Euro2020”? Because I believe it tells us something about the attitude of our hedonistic society. We want to pretend this ugly pandemic period did not exist. It was supposed to be “Euro 2020”? Let it be “Euro 2020”. We want to get back to our normal life as soon as possible and forget all the tough months we got to live through. Markets look already with confidence at 2022 and “prepandemic levels” in earnings and prices. Covid is “just a parenthesis between the words new highs”. But can we pretend Covid did not happen? I think it is childish. In the last year and a half, there are several things that changed for good. The most important one is that politics in the developed world went definitely left. This has implications for future corporate taxation and the shift in the pie distribution between profits and salaries/subsidies. I added the word “subsidies” because they are now ingrained in people’s mind as something due for divine right: “The state must take care of me, no matter who is going to pay (btw, not me)”. This mindset will be difficult to remove and, consequentially, firms will pay higher salaries to get people motivated to work. Fiscal spending is also here to stay. Does anyone remember the period of “austeritiy”? Do not worry about it, we will spend like crazy money we did not earn, distorting and crowding out private investment. You might not like it, but this is what is going to happen. Also, the concept of an independent central bank is gone. Central banks keep rates at zero or negative, buy government bonds at negative real rates and will continue to do so for the foreseeable future. Again, I am not saying this is right, I am saying this is the world we must live with for, at least, another 3-5 years. The investor community is happy with this landscape. Money for nothing and permanently high valuations mean good profits for the financial industry (including us). What could derail this scenario? The main culprit would be an inflation out of control. However, for the time being the market buys the Fed’s and ECB’s narratives that the current higher inflation is only a temporary phenomenon. Who am I to disagree? I only mention the very lousy track record of predicting inflation of the same central bankers that now seem so sure forecasting the future; dot plots anyone? On a macro level, the only area that still resembles a free market is the one of the major FX crosses (like EURUSD and USDJPY). They are too big and (still) not directly manipulated. Traditionally very difficult to trade, I guess that they would be the first and most important indicators to watch to understand if something fundamentally different is going on. If logic still applies to economics and markets, we should have a long-term trend of weaker dollar, also versus real assets. This Covid period has also important implications on a micro level. It accelerated the digitalization of society. Consumers got used to online services, consuming those already known even more and finding on the web new solutions for their old needs. Smart working and new corporate habits showed that productivity can be maintained (or improved) with a different kind of organization, less reliant on redundancy of personnel or physical real estate properties. The increased fiscal spending, with its focus on the green economy, is another long-term trend that is going to shape the industrial world. It is the job of a stock picker to understand these dynamics and find the good growth opportunities when the market offers some pockets of value for the well-placed companies or discounts a too bleak future for the ones left behind. For sure, over time, these new evolutions, will create wider gaps of performance between winners and losers. Winners and losers are also what we will have during “Euro2020”. 51 matches in 31 days across 11 venues, from London to Baku. A final advice from me to all football enthusiasts. Before getting pizzas and beers for family and friends to watch matches on TV, just check if you got the year, the date and the time right… you never know what they could do with the calendar in these funny days.

Peppe Ganci, CFA


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