This strategy letter has been going for 30 years – thanks for all your support during that time!

05 January 2021

For the 30 years of its existence, this monthly letter has attempted to offer original insights into the state of the financial markets. But all things come to an end, and the time has now come for me to hand over to the Chahine Capital team. The encouragement that I have received over the years has been the biggest reward of my career. As far as Chahine Capital’s own career is concerned, it continues under the wing of Iris Finance with assets now totalling a billion euros. Its performance has been even more impressive, at an annualised 11.2% and 11.7% over ten years for its two flagship funds.

2020 was an “annus horribilis”, as Queen Elizabeth remarked of an earlier time. Covid has spared nobody, but despite the economic damage it inflicted it was a stellar year for equities overall. The MSCI World index gained 14.1% in local currency terms and 16.5% in dollars, but performance was far from even and confirmed the pre-eminence of the digital economy led by the USA and now China, the new kid on the block. Wall Street progressed 21.4%; emerging markets were up 19.5%, almost entirely because of stocks listed in mainland China (up 69%) and Hong Kong (up 22.4%). The digital economy was the major beneficiary of the crisis, hence these performance numbers. The top ten contributors to world performance account for 10% of that 16.5% MSCI World gain, and all are Gafam-type stocks. Some of China’s equivalents appreciated by five to ten times over. The Chinese stock market is unchallenged as the second largest in the world, but it is a risky prospect given its lack of transparency and state interference, as Alibaba knows to its cost. China also lacks a Microsoft, on which it is 85% dependent, and is desperate to establish a local OS. Hacking and aggressive hiring of the best brains in the business are all fair game. At the other end of the scale, energy, finance and real estate were big losers over the year, as were a wide range of sectors directly exposed to the pandemic, such as air transport and leisure. Steep rate cuts and massive liquidity injections fuelled the market’s appreciation, with the help of a second wind in the form of good news on vaccines.
On 28 March we switched from an underweight to an overweight recommendation on equities; that was at 2,600 points for the S&P 500 and our position has not changed since even though the index closed the year at a record 3,756 points. Our other recommendations during the year were to buy gold at ],780 per ounce via futures and to reduce dollar exposure at 1.18 to the euro. We are keeping those recommendations in place for 2021. The dollar is a casualty of negative real interest rates, a widening US trade deficit and the prospect of yet more liquidity injections this year. Gold is a good response to this situation.

China’s burgeoning imperialism will be the major theme of 2021. Hong Kong has ben muzzled, Germany is threatened with a boycott of its cars if it does not opt for Huawei, and the Chinese government is not good at respecting agreements that it has made. Joe Biden’s arrival in the White House could create a united front with the EU against China, but China is proving adept at divide-and-rule and knows that the EU is not itself entirely united. Unexpectedly quick progress on vaccines should tame the pandemic, and although vaccination programmes have sometimes proved chaotic, governments and the pharmaceutical majors will get their act together and we ought to be looking at normal holidays this summer. The decline in world GDP was limited to 3.77% last year and we are set for a 5.1% rebound in 2021. Asian economies are set to perform best of all, and especially China at 8.3%. The US economy is also rebounding strongly, and we note a jump in the house price inflation rate to 7%. Brexit is done at last and the EU will be less affected by it than the UK.

We expect US profits to jump 22.5% this year after a drop of ‘only’ 16% in 2020 concentrated in energy and finance. The S&P 500’s 2021 PER is 22.5 and its dividend yield is 1.6%. Our model suggests that the market is fully valued; we have an objective of 3,753 points for year-end, in line with its 2020 close. It implies a 30-year yield of 1.66% and an 8-year CAGR of 6%; as that is higher than nominal GDP growth, it means another jump in margins via digital transformation. We are maintaining our recommendation to overweight equities.

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