Report by Adam & Company’s Investment Management Team.
Victor Frankenstein never reveals the secret of how he was able to bring the dead back to life. In the films – from Boris Karloff’s ‘Frankenstein’ to ‘Carry on Screaming’ – electricity is the key.
This is presumably as the novel refers to him infusing ‘a spark of being into the lifeless thing’, and indeed around Shelley’s time the Italian scientist Luigi Galvani achieved huge fame by appearing to revive dead animals by applying a charge to their limbs.
There have been plenty of things in markets which have burst back into life, having been written off for dead. Sterling has jumped, as have the values of industrial companies. The FTSE-100 index is closing in on 7,000, whilst UK small company indices hit all-time highs. The oil price is back above $60 a barrel. And economists are expecting a surge in the rate of inflation, as consumers’ excess savings from the past 15 months are deployed on having fun rather than ensuring a steady supply of bread making yeast and loo rolls.
Unlike the birth of Frankenstein’s ‘abhorred devil’, the cause of this monster rally in shares and economic data is clear. On the 9th of November 2020 Pfizer & BioNTech released the results of their Covid-19 vaccine trial and the direction of the world changed. Low interest rates and huge government spending were the electricity which jump-started the global economy, but the hope offered by vaccines showed consumers and businesses a world beyond the virus.
As a result, the fastest ever fall in shares in March last year became the biggest ever 12-month rally, and economists are scouring historical texts to get comparisons for the hugely positive year-on-year jumps in economic data – from business confidence surveys to job creation.
Unusual creatures have also emerged amidst all this optimism and hope, seemingly borne by free money and bored millennials. Intangible assets such as Bitcoin and ‘Non-Fungible Tokens’ (digital art) have surged in value. A few individual American shares have risen hundreds of percent on the back of individual investors coordinating buying in internet forums as they struggle to spend their government stimulus cheques on anything useful. And the market values a single electric car maker, Tesla, more than all other listed carmakers added together.
What do these examples of excess mean and where are the risks for investors in such assets and other more traditional ones? The main risk at this stage is policy error, both in the early tightening of spending and raising interest rates too quickly. Fiscal prudence and austerity are horrors of the past, set for the history books it seems, and the big central banks show no interest in changing policy at this stage.
In the story, Victor’s irresponsibility costs him everything. Could economies actually run too hot in coming months, and as a result see a surge in inflation and excess risk taking, the creature killing its creator? For now, we do not know but let’s enjoy the recovery whilst remaining alert to potential troubles ahead.
In trying to protect clients’ investments from the demon of inflation and beastly bubbles in certain assets, our philosophy remains the same: we continue to pursue good quality holdings, to try not to pay too much for them, and to hold them for a long time to get the benefits of compounding growth over the long term.
PLEASE REMEMBER THAT THE VALUE OF INVESTMENTS AND THE INCOME FROM THEM MAY GO DOWN AS WELL AS UP AND THAT YOU MAY NOT GET BACK THE AMOUNT ORIGINALLY INVESTED. PAST PERFORMANCE SHOULD NOT BE SEEN AS AN INDICATION OF FUTURE PERFORMANCE. WHERE AN INVESTMENT INVOLVES EXPOSURE TO A FOREIGN CURRENCY, CHANGES IN RATES OF EXCHANGE MAY CAUSE THE VALUE OF THE INVESTMENT, AND THE INCOME FROM IT, TO GO UP OR DOWN.
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The source data for each graph is supplied by Thomson Reuters DataStream, as at 31 March 2021 total return, local currency unless otherwise stated.
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Issued by Adam & Company Investment Management Limited (Adam), which is authorised and regulated by the Financial Conduct Authority. Adam is registered in Scotland number SC102144. Financial Services Firm Reference Number 141831. Registered Office: 6-8 George Street, Edinburgh, EH2 2PF.
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The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.
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We offer discretionary investment management to individuals and their families, and to charities. We take a long term approach to investing and we believe this gives us an advantage in a world where markets and media are increasingly focused on short term news.
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