Barita Insights: Weekly Newsletter November 30, 2020

With a month remaining in 2020, many have begun looking ahead to 2021, wishing to forget about 2020. Instead, we at Barita view 2020 as a critical indicator of what the future will be, not only in 2021 but many years after that. The events of 2020, underpinned by the COVID-19 global pandemic, has highlighted many weaknesses within the global economy. Trade disruptions (both supply and demand side), weak economic frameworks (limited fiscal and monetary capacity), susceptible industries, inequality (increased poverty levels and widening wealth gaps) and divergence of global economies (developing economies will continue to outpace emerging economies) are all issues which have been magnified by the pandemic. As such, in this week’s article, we explore the issues which have surfaced and highlighted the reasons we believe that improvements have already begun to repair the damages of 2020 and how this will impact asset classes.

Technology, Now or Never
The biggest lesson from 2020 is that technology is here to stay, the quicker you are the accept this truth, the better position you will be to adapt to the future. Businesses that had integrated technology into their products have been the primary beneficiaries during this pandemic. This is reflected in the SPX index, which is the only index to have gained over 30% on a year-to-date basis. Entities in other industries have also benefited from introducing technology into their operations, which contrasts with recent foot traffic at stores on Black Friday, which fell by 52.1% when compared with last year. This mirrors a trend whereby traditional shoppers have been shifting from heading to malls and queuing up in lines to now shopping online, according to preliminary data from Sensormatic Solutions. This trend is here to stay, and entities that are technology-based have added access to higher levels of liquidity both from the bond market and the private markets. This is evidenced by telecommunications, consumer products and high technology being the industries that raised the most debt during the recovery period.

Economic Policy, All or Nothing
The impact of COVID-19 has brought out a creative side of economic policymaking not seen before globally. Countries like Germany that have built- in a “balanced budget mandate” from 2009, which means they will only spend what they earn, has decided to step away from this policy due to COVID-19. The United States debt level is inching closer to 100%, the highest level it has been post-World War II. Global debt levels, both sovereign and corporate, are approaching a historical US$227 trillion. Among developed nations, debt surged above 432% of GDP in Q3, a 0.50% increase from 2019. In emerging markets, debt levels rose to over 248% of GDP, with Lebanon, China, Malaysia and Turkey experiencing the biggest increases in non-financial-sector debt. This level of debt has been viewed as necessary as governments essentially do whatever it takes to support their ailing economies, both households and businesses, while also supporting the key industries, mainly health and financial. What this means is that going forward, there will be an increased amount of credit risk within the bond markets as debt has to be repaid. Businesses that have adapted to what the future will be are best positioned to repay their debt while ‘zombie companies’ will continue to seek support from their governments and without this assistance, could become extinct.

Herding in the markets presents opportunities
It’s easy to forget that global stock markets plummeted, on aggregate, by 30% in March when today some have regained almost half of that, and others are even positive. What does that mean? Essentially, markets are a social construct, and by design, social constructs are flawed. A significant flaw of the market is human psychology in the aggregate which essentially means, most investors will buy when the market is rising as they do not wish to miss the “winnings”. Conversely, everyone sells when the market is losing value rapidly as they fear losing all their money. It is then important to use these extreme selling moments as an entry point (favourable buying opportunity) into good companies, with great management and a sound outlook beyond the very near-term horizon that is filled with volatility.

In hindsight, despite all that is happening economically, investors would have significantly gained if they positioned themselves appropriately for the future. But not all the opportunities are gone. For example, the Jamaica Stock Exchange (JSE) is still in bear-market territory, meaning the JSE is still down by over 20%. Hence there lies an opportunity to capitalize on the current bear market (please see Investment Playbook for such opportunities).

Given the vast number of underlying opportunities remaining as we approach the new year, the best means of capitalizing on them is through unit trust products while the market is still down. Barita’s suite of Unit Trust products, namely FX Bond Fund, Capital Growth Fund, FX Growth Fund, Money Market Fund, And Income Portfolio allows investors to gain exposures to these opportunities at a much lower cost versus direct exposure, thereby benefiting from diversification and the guidance of certified portfolio managers. As we approach the future, being positioned in these funds is the best way to capitalize on the current opportunities today in preparation for tomorrow.