Next Saturday will mark two terrible years since Britain’s first Covid lockdown began on March 26, 2020. That prompts this DIY investor to ask: what have we learned and how might it help us cope with our current worries?
Let’s start with the sad fact that the virus is not nearly as vanquished or past tense as wishful thinking and the removal of England’s pandemic restrictions might suggest. Last Sunday, in response to a new Covid outbreak in China, the authorities placed 17.5 million residents of its southern city of Shenzhen in a lockdown.
Many folk may say they have never heard of the place — and might have said the same about Wuhan, where the first Covid cases were identified — but Shenzhen happens to have the third-largest container port in the world. It was well on its way to becoming a leading manufacturing hub when work took me there in the 1990s.
So I would say the first lesson of lockdowns and the Covid crisis is that investors need to think internationally. Imagining that horrible things happening to people in faraway places will stay there and not affect us might prove complacent as well as callous.
You don’t need to believe nonsense about butterflies’ wings to see that the economy is more global and interconnected than it has ever been. It is worth considering whether the asset allocation of our investment portfolios should reflect that fact.
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US businesses now account for more than two thirds of the value of all the shares traded on this planet. By contrast, those listed on the London Stock Exchange represent just over 4 per cent of the global total.
Both those statistics are taken from the Morgan Stanley Capital International (MSCI) world index, a widely-followed benchmark. So, for the benefit of folk who ask why my top three shares by value are American, it may be worth pointing out that all the top ten shares in the MSCI World Index are American.
The second lesson of lockdowns flows from the first; diversification is the simplest and surest way to diminish the danger of catastrophic capital destruction. The aim is to reduce our exposure to the risk of shocks in any one company or commercial sector, country or currency.
For example, my top ten shares by value are, in descending order, the technology giant Apple (stock market ticker: AAPL); the tractor-maker Deere (DE); the world’s biggest fast-food chain, McDonald’s (MCD); the Swiss food giant Nestlé (NESN); the agricultural commodities trader Archer Daniels Midland (ADM); the pharmaceutical group Pfizer (PFE); the Australian miner BHP Holdings (BHP); the self-descriptive investment trust Worldwide Healthcare (WWH); the German sports goods group Adidas (ADS); and the Danish diabetes and obesity-care pharmaceuticals company Novo-Nordisk (NVO).
The third lesson is follow the money, whatever happens, because it’s an ill wind that blows no good. However grim the immediate outlook and however obvious the losers may be, the economic sun is shining somewhere and there will be businesses that benefit.
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For example, Pfizer is a clear winner from Covid after being the first to obtain authorisation for its vaccine, while Worldwide Healthcare Trust and Novo-Nordisk also gain from increased spending on healthcare. Deere and Archer Daniels Midland harvest rising revenues from agricultural commodities priced at record highs, as the war in Ukraine hits Europe in the breadbasket. Apple and, less obviously, Adidas are both winners from working at home, with more of us spending more time and money, dressed-down in front of computers.
The fourth lesson is not to let short-term shocks deflect us from our long-term investment objectives. At the start of the coronavirus crisis, global share prices plunged and many commentators advised selling and switching into cash. One or two even said they had done so.
By contrast, I was one of the few to point out that selling after share prices had fallen would turn paper losses into real ones. As my main investment objective is to pay for an enjoyable retirement, short-term shocks scarcely matter so long as I retain shares in the ownership of businesses that continue to trade profitably.
The fifth lesson of lockdowns flows on from the fourth; don’t forget the dividends. Next Wednesday is the last day for new investors to share in a record $7.6 billion income distribution by BHP, which is the highest yielder in my Isa, paying 10.5 per cent tax-free income. Unlike British shares in the same shelter, it really is tax-free because the US$1.50 per share payment is deemed “fully franked for Australian tax purposes”.
That’s not the only yielder in my top ten to benefit from the rotation in financial fashion away from low or no-dividend growth stocks toward value shares that pay decent dividends. Others include Pfizer, yielding 3 per cent, and McDonald’s and Nestlé, which both pay 2.4 per cent.
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The sixth lesson is to seek real returns. Rising inflation is inflicting a slow-motion robbery on risk-averse savers in cash deposits. I would much rather own shares in high-quality businesses that might deliver capital growth in the future, but that also have the ability to raise prices, and investors’ income, here and now.
So many things that seemed improbable, if not impossible, have happened in the past two years. But the “forever” fund has fared well so far and I continue to hope for the best, while preparing for the worst.
Get ready for Sunak as Scrooge
Rishi Sunak is much too polite to put it this way, but I expect Wednesday’s spring statement will see him effectively argue that he needs our money more than we do. Who can blame him after all the unexpected emergency expenditure the Treasury has been obliged to fund recently? Nor is there any end in sight, as one crisis follows another.
So we might as well forget Santa Sunak, who sprinkled freebies to grateful guzzlers via Eat Out to Help Out, and get ready for Scrooge Sunak. Unfortunately, few voters have any appetite for the savage spending cuts or tax hikes necessary to balance the books. Like many chancellors before him he will be tempted to let inflation reduce the real value of government debt. This is already underway with the Consumer Prices Index (CPI) measure of inflation at 5.5 per cent in the year to January and the more realistic Retail Prices Index (RPI) at 7.8 per cent.
Similar trends around the globe may help to explain why shares in the world’s biggest gold miner, Newmont (NEM), that I bought for nearly $62 three months ago now cost $74 ex-dividend. That means buyers tomorrow won’t get the next income payment.
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This income added up to 3.6 per cent a year when I invested and remains worth 3 per cent to new buyers. That’s a big attraction over gold itself, which pays no income. But in a world where democratically elected politicians are forced to make increasingly difficult decisions, I expect gold and its miners to shine for a completely different reason. Governments cannot print more of the stuff.
Read a full list of Ian Cowie’s “forever fund” at thesundaytimes.co.uk/cowieholdings
