In the meantime, the equity markets have risen from their ashes. The presidential elections are over, we are hearing positive news about vaccines and the third quarter earnings season was particularly robust. Let us address this while sticking to the communication framework we have used since the beginning of this crisis and zoom in on the three fronts of this war:
1) The health crisis
“Never underestimate human ingenuity,” we wrote in our first comments in March. To prove our point, after promising test results there are already 3 vaccines that are expected to go into mass production in the first quarter of 2021. As you know, the effectiveness of vaccines varies greatly. Some of them only achieve a 50% success rate, which is nevertheless still sufficient to suppress a pandemic. The vaccines from Moderna, Pfizer and Astra Zeneca, on the other hand, achieve percentages above 90%, which is simply stunning. In 18 months, we will have made the journey from the first infections to group immunity, thanks to a massive vaccination initiative. This prospect is heartening at a time when we are having to deal with a second wave of Covid-19 worldwide and the very difficult lockdowns that go with it.
2) The real economy
It surprises even us how resilient the economy is proving to be in this pandemic. In this connection, the third quarter results season was once again much stronger and better than expected. Ultimately, the profitability of the larger listed companies in the USA will decrease by 15%, which is a tremendous achievement. Smaller companies have seen their profits decline more sharply (around -30%), and there has also been a sharper fall in profits in Europe (around -25%).
Here, the flexibility shown by businesses in unforeseen circumstances is one of the best arguments in favour of your investments in the companies we have selected. In the meantime, growth has picked up again in Asia and 2021 will be a year of spectacular economic recovery.
3) The financial markets
The common theme characterising the financial markets remains the established fact for the coming years: interest rates will be kept low by central banks in the foreseeable future. In other words, there is a lot of money looking for assets that are still generating a return, as opposed to cash, which will lose purchasing power for years to come.
The return that our companies currently generate for the shareholder (in our jargon, the free cash flow) amounts to around 5% to 6%. This risk premium can be achieved by the steadfast investor with an investment horizon of 10 years. Of course there will be market corrections, but you know how we view those: market corrections are not only unpredictable but, above all, they continue to be excellent buying opportunities. And waiting for the next market correction usually costs more in missed returns than the next correction itself.
In this newsflash, you have not read a single remark about the US presidential elections, which is a classic example of how financial markets rapidly shift their attention and are always forward looking. The bottom line from these elections is, of course, a new president, but what is far more important for the markets is that President Trump’s pro-business policies will be continued. After all, the Democrats have lost seats in the House of Representatives, and the Republicans are likely to retain control of the Senate. Meanwhile, the new president will no doubt work to re-establish some international ties, a scenario which is particularly appealing to the financial markets.
Conclusion
What is most important in all of this is to maintain our focus on disciplined long-term investment, even if this requires a great deal of patience and dealing with unforeseen temporary events.
Yours sincerely,
The Management of CapitalatWork Foyer Group
