Every year, MECHELANY ADVISORS articulates its SEVEN INVESTMENT CALLS for the year and leaves them available for checking at all times during the year. They are usually global Macro-calls and up till now our track record has not been bad.
Reviewing our seven investment calls for 2020
Before elaborating on OUR SEVEN INVESTMENT CALLS FOR 2021, it is our tradition to review how accurate our predictions were for the previous year.
We published OUR SEVEN INVESTMENT CALLS FOR 2020 on January 15th 2020
To say the least, 2020 was one of the most unusual and unpredictable year on record for the world economy and the financial markets in general.
The COVID-19 Coronavirus hit the world like a meteor at the beginning of the year, initially in China and then spreading globally, forcing partial or total lockdowns of many countries for several months.
To contain the economic and social damage of the virus, Governments enacted unprecedented fiscal stimuluses while their central banks used quantitative measure to an extend never seen before.
The US, the UK and India experienced the highest levels of contamination and casualties and their economies plunged into the biggest recession since the great depression of the 1930s. By contrast, China, Korea, Taiwan and to a lesser extent Japan managed to keep the health hazard under control and their economies were less affected.
Depending on their political, social and economic systems, countries reacted differently to the pandemic. The Asian countries, with their strong culture of community and discipline and those with a strong centralised political system and citizen-tracking culture such as China managed to contain the economic and social damage much better than most Western Democracies, explaining the wide differences in the pace of recovery.
As we are ending 2020 with a second and more contagion wave of contamination due to a mutant version of the virus at the time where vaccines are being rolled out, one thing that can be said is that the lasting impact of the virus will be strikingly different in the future depending on the economies and regions of the world.
2020 was also the year where China clamped down politically on Hong Kong, where the Arabs countries of the Gulf and Israel came to a peace agreement and where Donald Trump lost not only his bid for re-election to Joe Biden , but also lost the Republican majority in Senate, giving the Democratic Party control over both houses.
In nutshell, what can be concluded from 2020 is that COVID triggered two situations with significant consequences for the future:
It enabled China to make a quantum leap in closing the gap with the USA, being the only economy of the world to experience year-on-year growth in 2020 while the rest of the world will probably end up with a 4 % contraction for the year. The economic efficiency of the Chinese political eco-system was clearly vindicated in the handling of the COVID-19 black swan event.
The unprecedented liquidity and fiscal stimuluses engineered by Central banks and Governments as a reaction to COVID-19 had the effect of pushing the Juglar Cycle even further than we predicted and sent asset prices to valuation extremes unheard of in history. Near zero interest rates and bond yields fuelled asset bubbles in several asset classes, industries benefitting from”work-from-home” and electric vehicles stocks.
Despite this highly unpredictable environment, OUR SEVEN INVESTMENT CALLS FOR 2020 proved to be remarkably accurate.
Key Call # 1: STAGFLATION
Our key investment thesis for 2020 was that
“The world economy would continue to weaken in the first and second quarter of 2020 before recovering in the second half of the year. However, in the main economies of the world apart from China, we could reach a stage of stagnation in the second quarter of the year, with significant downside risks to the outlook and even maybe a recession.”
Indeed, as the following OECD tally shows, in 2020, the world economy experienced its worst recession on record since the 1970s.
Clearly, this unique and steepest recession since the wartime was the result of the lockdowns imposed by COVID-19 but the seeds of the economic downdraft were already sawn in 2019.
And as we predicted, CHINA will be the only economy of the world to experience growth in 2020, with a 2.2 % increase against a 4.2 % contraction for the world at large.
With regards to Inflation, we were writing the following :
“The worrying part for the predictable scenario for 2020 is a global and coincident increase in inflation on the back of stronger labor markets and higher commodity prices, and in particular, soft commodities.”
Although neither the world CPI nor labor costs increased in 2020, due to the highest unemployment on record since WW2 due to COVID, inflation expectations ended the year at 2.70 %, way above current levels,
while copper embarked on the strongest rally in a decade, rising 47 % on the year and soft commodities rose by 13 %
We are clearly in a secular bull market in commodities and soft commodities in particular and we see this trend continuing in the years ahead.
Key Call # 2: A WEAKER US DOLLAR
On January, 15th 2020, we made the case that the US dollar had reached a secular peak and would break down from the secular uptrend that had started in 2009 .
We were writing the following :
“The US Dollar Index has peaked just on the very long term downtrend while the moving averages are rolling down and a head-and-shoulder is forming with the 2015 and 2016 tops. The next move has targets towards 94 initially and then 90 on the index.“
As can be seen frmm the following chart, we closed the year spot on our 90 target on the DXY
The EUR also broke out of a major downtrend and finally of a long term triangle as the spread between US bond yields and German bond yields collapsed. The European currency started the year at 1.10 and ended it at almost 1.23, rising by 11.8 % in 2020.
The Japanese Yen established a new appreciation trend in 2020 starting the year at 110 to finish at 103.
One of our main call was also for the beginning of a secular appreciation of the Chinese Yuan, and indeed the Chinese YUAN rose by 7.50 % against the US dollar in 2020.
Key Call # 3: A SECULAR TOP IN EQUITIES
2020 was an amazing year in equity markets. It saw the steepest bear market on record with most indexes falling by 40 % in the matter of two months and the fastest recovery ever with the Nasdaq ending the year 43 % higher than where it started it and 90 % higher than the March 23 bottom.
Never in history have equity markets rebounded so quickly from a bear market, and this despite the underlying economy still in the doldrums, earnings still in decline and the highest unemployment rates since WW2.
At the beginning of the year we were writing :
“In conclusion, we are either very close to or only 10 % away from a major secular top in global equities.”
“Tactically, after the aggressive Q4 2019 rally, markets are starting very overbought into 2020, and the risks of a classic tactical washout from an early January top into a March bottom is very high”
The SP 500 started 2020 at 3230 at peaked on February 19th at 3393, a 5 % appreciation, and we could not have been more accurate on the timing of our predictions.
On March 18th 2020, we published an article titled TURNING POINT , just four trading days before the final bottom of the market.
In this post, we were writing :
“Nevertheless, the speed of the collapse calls for a sharp rebound at some point and all our indicators are telling us that we have reached this stage, or are very close to it.”
Finally, on March 30th 2020, in a 71-page weekly report titled LASTING BOTTOM, we made the case that the massive monetary and fiscal measures taken by Central banks and Governments around the world has averted a deflationary meltdown and that the bottom of the market would be lasting.
We concluded then :
“What this and many other indicators are telling us is that the march 23rd bottom is a rock solid bottom for now.”
Our call for a secular top in equities in 2020 was based on a weakening of the economies and of industrial profits overall. In fact, COVID -19 made the economic recession. and profits decline much worse than expected , but the unprecedented liquidity injection and helicopter money sent by Central banks and Governments kicked the can of the equity cycle further down the road, creating the biggest disconnect between the behaviour of equities and their valuations and the hard reality of Main Street, fuelling a speculative bubble in the process.
Indeed 2020 was the year of the letter “K”, with economic sectors doing rather well while entire other sections were decimated. Likewise in equity markets, some segments did extremely well and most others are still lingering ib^n bear market territory, lingers ng well below the levels they started the year at, something that is clearly not reflected in indexes that are heavily titled towards tech mega caps.
To illustrate the point, RENAULT of France ended the year 15 % lower than it started it while APPLE computers ended it 88 % higher.
Key Call # 4: THE CHINESE DECADE
In this section of OUR SEVEN INVESTMENT CALLS FOR 2020, we made a lengthy case for the reasons why the Chinese enemy and Chinese assets would leap forward in 2020. This case was based on several tenets that we developed individually :
. A Superior Governance System
. The rising tensions with the US
. The blossoming of the Chinese Consumer
. Demographics and,
. The strategic objective to make the Chinese wealthier through currency appreciation
We concluded this section by writing :
“The Chinese decade will see the Yuan and Chinese equities embark on a secular bull market that may ultimately take them to highly overvalued territories if history is any guide.
It will be fueled by higher economic efficiency and massive inflows of liquidity as global investors re-position their portfolios out of the US and into China.
As always, it will not be without risks and volatility, but investors should not wait for before positioning themselves seriously into Chinese assets”
And indeed, China’s domestic CSI300 index was the second best performing index in 2020, just behind the Nasdaq, and at te time of writing, on a twelve month rolling basis, it has actually outperformed it with a +41 % apprecaition
Like wise, and as seen higher up, the Yuan embarked on an uninterrupted pace of appreciation during 2020.
China will be the only economy to show positive growth in 2020 and it is expected to grow at 8 % next year.
Although it has seen its public debt increase markedly like all other countries, due to the combined effects of stimuluses and lower tax receipts, its monetary policy has remained moderate and the balance sheet of the Central banks has not seen the explosion witnessed in other major economies such as Japan, Europe or the USA.
Finally, and despite Donald Trump’s ill-conceived trade war, levies and sanctions, its trade surplus has continued to grow with both the USA and the rest of the world.
We see these trends continuing in the coming years and see 2020 as the year where China took a significant leap in its quest to becoming the world largest economy of the world, something that is now confirmed by the OECD who has revised its projections, bring that date forward by five years.
Key Call # 5: BULLISH PRECIOUS METALS
In our calls for 2020, we made the case that precious metals had ended their bear market that started in 2011 and started a new secular bull market, fuelled by negative interest rates across the board and as a portfolio diversification in light of low bond yields and overvalued equity markets.
We were writing :
“2019 was really the year where precious metals confirmed the change of trend and started a new secular bull market of which we have only seen the first leg for now.
The bull market in precious metals has just started. Investors should remain exposed with a strong preference for Silver”
Indeed Gold started the year at 1510 and reached 2000 in 2020, a 32 % appreciation, and Silver started the year at $ 17.5 and reached $ 30 in early summer a 71 % appreciation.
On March 22nd 2020 in an article titled Massive Liquidation Offers Phenomenal Entry Point, we recommended our readers to pile in SILVER at US$ 12, allowing them to tremble their money in the matter of a few months.
Our #1 recommendation for 2020 was posted in April 2020 and was a leveraged ETF on GOLD Miners which delivered a 100 % appreciation in a few months.
Key Call # 6: A NEW COMMODITY CYCLE
In this section we were writing :
“The reflationary liquidity impulse of 2019, negative real interest rates, rising inflation and an easing of the US-China tensions allowing China to stabilize are all tailwinds that should ignite a global commodities bull market in 2020.
and we detailed our predictions as follows :
. the bull market has already started in SOFT Commodities.
. the bull market is about to start in industrial metals.
. the one exception is oil prices.
Our case was made on both fundamentals, Negative interest rates, and technicals.
The following 12 months performance table shows the outcome.
Soft commodities had a bumper year with Soybeans rising 52 % and corn 36 %, Iron ore rose by 72 % while copper added 28 %. and indeed, as we predicted Oil ended the year in negative -8 %, with prices even falling in negative territory and trading at -35 $, a first in history.
Key Call # 7: POLITICAL RISKS
In our last section we developed the key political risks of the world in 2020 :
. We put a non-negligeable probability that Donald Trump would lose the US presidential elections, but were wrong on our assessment that Michael Bloomberg could become the US 46th President.
. We highlighted the growing tensions in the Middle East, between the USA, Israel and Iran and between Israel and Lebanon’s Hezbollah, with a considerable risk of a global war. Thank God it did not materialize,
and finally, in our most out-of-the-box prediction we worried about Kim Jung Un doing something very stupid.
This is what we were writing :
“Could Kim Jong Un do something stupid?
In our Article titled “BEWARE OF THE HERMIT”, we highlighted the discrepancy between North Korea’s perception of its own reality as a Nuclear power and the rest of the world’s perception that it needs to de-nuclearize.
Western sanctions on North Korea are having very little effect and will not have any for as long as China offers North Korea an economic output. However, North Korea knows that it needs to open up and start developing its own economy with the rest of the world and with South Korea, but it views its Nuclear arsenal as the only guarantee of survival of its unique regime.
Kim Jung Un is now in a position where he wants to force Donald Trump and the rest of the world to recognize its nuclear status while lifting economic sanctions.
In 2019 it threatened America with a nasty Christmas Present that did not materialize and in January 2020 he promised the world to come up with a new and terrifying weapon.
Wait and see …”
We let our readers come to their own conclusions about the sudden appearance of COVID-19 and only history will tell if it was a “Genetic Black Swan” or an engineered weapon of mass destruction.
We highlighted our worries in an article titled BEWARE OF THE HERMIT on December 15th 2020,
and again on February 26th 2020 in an Article titled North Korean FLU ?
but the fact of the matter is that if COVID 19 was engineered in North Korea as this “New Terrifying Weapon “, it has realiyez the objectives of Kim Jung Ung to kick Donald Trump out of office while demonstrating his own power of nuisance.
All in all, OUR SEVEN INVESTMENT CALLS FOR 2020 proved to be remarkably accurate with 6.3 out of seven spot on even in terms of timing.
If our latest call on North Korea proves to be true I the future, we will have been the only research firm to highlight this possibility.
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