Markets wise, it feels like there’s a lot to worry about right now. The US election promises to be an ill-tempered, high-stakes contest, with the potential for all sorts of civil unrest, legal challenges, and general prolonged uncertainty. Like 2004, only with less goodwill.
Covid-19 is still hanging around. Governments across the UK are now competing to invent the most elaborate lockdown systems. England has three tiers, so Scotland just upped the ante with five. We await the next bid eagerly.
None of this is encouraging. And yet, if you look a little further ahead, there may be two very good reasons to be cheerful.
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Two events that could send markets a lot higher
We’re all long-term investors. (Except those of you who aren’t, but everyone’s welcome here). So let’s try to cut through the short-term noise. Two things will happen at some point in the relatively near future which will lift a lot of the current feeling of limbo that seems to be afflicting both markets and humanity in general.
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One – someone will win the US election. Whoever it is plans to spend a lot of money. This is probably the main reason that markets aren’t freaking out about a potential win for Joe Biden. It’s not because they assume Donald Trump is going to win again, despite the views of the polls and betting markets. It’s because Biden’s promises of $2trn-odd in spending are more than enough to offset any concerns about reversing Trump’s tax cuts.
Two – coronavirus will stop being such a big issue. We might get a vaccine, it might die out, or we might just have to learn to live with it. Whatever the answer, the economy can’t remain in a state of semi-suspended animation forever. Bear in mind, China is already not far off being back to business as usual. Its economy might even grow this year. And it doesn’t seem like the worst template for anyone trying to forecast the rest of the world’s recovery trajectory.
You’ll read rapturous praise of China’s handling of the crisis from the odd buffoon with a political point to make and a quick column they need to write. But I’m inclined to point out that China started earlier than everyone else – I mean, the outbreak did originate there, let’s not forget – and so got it over with earlier than everyone else too.
This is not to say that individual government policies don’t have an effect. Of course they do. But with Wuhan now apparently one of China’s most popular holiday destinations, it seems clear that you don’t need a vaccine to allow your economy to return to something approaching normality. For more on investing in China, by the way, you should listen to Merryn’s most recent podcast, with Pictet Asset Management’s Shaniel Ramjee – he makes a very persuasive case.
Anyway, my point is this: you get a big spending government in the US and you get an economic recovery during which – I suspect – demand will explode, having been squashed for such a long period of time.
Goldman Sachs reckons commodities could return 30% next year
What’s the likely outcome from that? I can’t see it being deflationary. Right now, it feels that way. We’re not really going out – we’re not allowed to in many cases – and lots of people’s jobs are either at risk or have been lost. But we’ll be entering a period where supply in many sectors will have been wiped out. Despite all the job losses, I expect that demand will recover more quickly than supply can come back to match it.
The speed of this recovery will depend in part on the policies that governments pursue. My own view is that, right now, worrying about the debt pile is not the priority. I say that as someone who is often worried about the debt pile, so I don’t say that lightly. But if you want people to get out there and spend and expand and act like human beings with a future to look forward to again, then what you don’t do is impose a ton of new taxes or slash their wages or suffocate them under a pile of new bureaucracy.
Or impose negative interest rates, for that matter.
An inflationary result would be very good news for asset prices in general, at least in the early stages. Central banks would be happy to let inflation rise. They’d make an effort to keep bond yields suppressed. In fact, that might be when you see formal yield curve control (where the central bank targets interest rates across the bond spectrum, with the aim of keeping short-term rates low and long-term ones a bit higher) being introduced in the US, for example.
Equities would like it. But the sector that would like it the most is almost certainly the commodities sector. Note that copper has just hit its highest price in more than two years. And Goldman Sachs has just published a very bullish outlook for commodities. As the Market Ear website highlights, the investment bank reckons that commodities (as a group) will return nearly 30% over the next 12 months. You probably don’t need me to tell you that that’s an exceptionally punchy forecast for any asset class.
The breakdown is interesting. It reckons precious metals will return 17.9% (you have to love those decimal points, I think that’s the analyst’s idea of a joke). Industrial metals are on a mere 5.5% (as copper suggests, they’ve already done pretty well this year). And energy is the big comeback king – with a forecast 2021 return of 42.6%.
Will it happen? Who knows – even Goldman Sachs can’t predict the future and no doubt some other part of the bank is shorting all of those things even as we speak. But as a scenario, it doesn’t seem outlandish.
It's also interesting that US bond yields are showing very (very) timid signs of nudging higher (at least, as long as you draw the lines on your charts in exactly the right places). That would point to a market that does feel that inflation might be closer than it might feel right now.
I’ll be writing a lot more about the potential for an inflationary outcome, and how to invest for it (including how to profit from any massive return for the commodity sector), in the 20th anniversary issue of MoneyWeek magazine, out on 6 November. If you don’t already subscribe, sign up now to get your first six issues free so you don’t miss it.
