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. 

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...

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