Prepare your portfolio for a return of the Roaring ’20s

Get ready for a boom. Starting next week, the UK is rolling out a vaccine for Covid-19. That has to be good news for the economy – it marks the beginning of the end of lockdowns. And in fact, it might be much better news than anyone expects. Some have suffered far more than others as a result of lockdown, but it is clear that, on aggregate, it has been good for household balance sheets on both sides of the Atlantic. As Richard de Chazal of wealth manager William Blair notes, in the US last quarter “debt as a percentage of disposable personal income fell to its lowest level in a quarter of a century”. In other words, there’s a lot of money out there waiting to be spent.

Some naysayers point to surveys suggesting that consumers plan to maintain the savings habit once lockdown is over. But after a year of no holidays, no eating out and no high street shopping sprees, how inclined to fiscal prudence will we really feel? We suspect this is one of the few occasions where the phrase “pent-up demand” has genuine meaning. So the stage is set for a short-term boom as all that delayed demand floods out in the early part of next year. But what happens then? Why will this be anything more than a short-term sugar rush?

Governments and central bankers entwined

The key rationale for not just one good year, but an entire “Roaring ’20s”-style decade, is that this is the era when we finally throw off the deflationary fog that has hung over the global economy since the financial crisis, and enter a much more inflationary period. This will bring its own problems – financial repression, the policy of holding interest rates below inflation, will squeeze a lot of portfolios. But in the meantime, growth will heat up, and assets that lost out in recent years will see their fortunes reverse. The clearest marker of this new dawn came this week, as incoming US president Joe Biden nominated Janet Yellen, who preceded Jerome Powell as head of the Federal Reserve, for the post of treasury secretary.

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That is incredibly significant. For about a decade now, central bankers have been complaining that they can only achieve so much with monetary policy. They need governments to help by directing the spending of all the money they have been printing. This complaint has only grown louder amid the economic damage wrought by lockdown. Now the former head of the world’s most powerful central bank will be running the fiscal policy of the world’s most important economy. Congress might be gridlocked, but it’s hard to believe that Yellen won’t have the clout to drive through at least moderately ambitious spending plans. We’ve already seen a reaction from US bond markets – long-term interest rates, which have been nailed to the floor all year, began to rise this week.

Meanwhile in the UK, while Chancellor Rishi Sunak might be jittery about our high levels of debt, he’s not exactly keen to do anything about it. Tax rises or spending cuts will be driven by politics, rather than any effort to reduce debt. So we may well see a hike in capital gains taxes for the sake of targeting “the rich”, but don’t expect that to make a dent in the national debt. Instead, central banks will be underwriting government cheques for years to come. Where will the money go? There are lots of ideas out there (politicians can be very creative with other people’s money) but the overarching theme across all corners of the globe is that of a “green” infrastructure boom. Unlike many forms of debt relief (which we may eventually get too), it’s uncontroversial – try opposing efforts to tackle climate change and see where it gets you – and so it’s the perfect excuse for governments to spend.

Does that mean you should be investing all your money into wind farms and hydrogen? We’ve looked at ways to invest in the green sector in recent issues (and if you’d bought any of our hydrogen tips earlier this year you’ll already be sitting on some very healthy gains). However, a lot of growth is already priced into many of these assets – arguably electric car manufacturer Tesla is the standout stock of the “green tech” boom, and, whatever else you can say about Tesla, you can’t argue that it’s cheap. So while there’s potential for decent returns from “green” stocks, and you should have exposure, that’s not where we want to focus this week. Instead, two main areas, with a certain amount of overlap, look particularly promising (and cheap) now – commodities and value.

Investing in the new commodity supercycle

One beneficiary from a Roaring ’20s should be the commodities market. Put simply, under-investment (due to a long bear market in commodity prices) has hit supply, while demand is set to spike due to infrastructure spending. That should drive prices higher and be good for producers. The commodities and natural resources investment trust sector is small, with seven trusts in all, according to the Association of Investment Companies. Three are specialists. Riverstone Energy is shifting strategy from oil and shale assets towards renewables; Geiger Counter (LSE: GCL) focuses on uranium; and Golden Prospect Precious Metals (LSE: GPM) focuses tightly on gold and silver miners. Both of the latter are good bets for investors looking for exposure to those specific sectors – Riverstone might represent a good bet but those looking for exposure to oil might be better with the iShares Oil & Gas Exploration & Production exchange-traded fund (LSE: SPOG).

If you’re looking for wider exposure, that leaves four trusts. Baker Steel Resources (LSE: BSRT) runs a very concentrated portfolio (about 85% of the trust is invested in ten holdings) of mostly unlisted natural resources companies. It trades on a discount of around 10% to its net asset value (NAV) – the ten-year average is 25%. About half of the portfolio is in precious metals. For a less concentrated (and thus less risky) fund, BlackRock World Mining (LSE: BRWM) trades on a discount of 8% and pays a 5% dividend. About a third of the portfolio is in gold miners, another third in “diversified” miners, and a fifth in copper.

An even wider spread can be found in CQS Natural Resources Growth & Income (LSE: CYN), which has a lower weighting towards gold, but significant exposure to shipping, as well as a little bit of lithium and palm oil exposure. It’s on a 16% discount and offers a dividend of about 5.5%. An alternative which gives exposure both to the commodities boom (half its assets are in mining, and about 20% in conventional energy) and the green infrastructure trade (about 30% of the portfolio) is BlackRock Energy and Resources Income (LSE: BERI). It trades on a discount of around 13% and pays a dividend of just over 5%. For more explicit protection against financial repression, own some gold. And perhaps a small allocation to bitcoin – just in case.

The return of value

Value (cheap stocks) has been underperforming growth (expensive stocks) for a long time. From a big-picture perspective, that’s been driven by the belief in “secular stagnation” – a future of weak growth, low inflation, and low interest rates. But after a few false dawns, it looks as though the vaccine news might have been the trigger to turn this view around. So what are the most obvious beneficiaries of a “great rotation”?

Goldman Sachs makes the case that even the US S&P 500 – currently more overvalued than at almost any point since the dotcom bubble – will go above 4,000 by the end of next year, as neglected value stocks catch up with the Big Tech stocks that have led the market for the past few years. But if you’re looking for actual value as opposed to relative value, there’s one place that should still be first on your shopping list – the UK. The FTSE 100 is more stuffed with value stocks (such as commodities and financial stocks) than any other major index in the world. Throw in the fact that, one way or the other, Brexit is going to be resolved soon – meaning that global fund managers will find it harder to simply ignore the UK – and a lot of money could be flowing the UK’s way soon.

You could buy a simple FTSE tracker fund to benefit. Actively-managed options include Fidelity Special Values (LSE: FSV) which has 80% of its portfolio in the UK, pays a dividend of around 2.5% and trades at a slight premium to NAV, or MoneyWeek portfolio pick Law Debenture (LSE: LWDB), which yields 4% and trades roughly at NAV (see page 24 for more ideas). Or you could go for a “best of both worlds” global trust that has already done well from the great rotation: Monks Investment Trust (LSE: MNKS). As Citywire notes, while it still holds plenty of growth stocks, since April, Monks’ managers have moved part of its portfolio into recovery plays, including London-listed miners and global travel stocks. As a result, in the six months to the end of October it returned 25.7% (with dividends). It trades on a small premium to NAV.