Obvious Investor – COVID-19 & Investments Update
Last Updated on 20th March 2020 by Mark
I’ve had several questions from readers asking my opinion on the current state of the economy due to the Coronavirus outbreak & what I’m doing with Peer to Peer lending. Plus a few questions about the securities & commodity market pullbacks and the craziness going on there.
So rather than keep answering questions individually, I decided to write this post on what I believe is happening and how I’m reacting to it.
Below you’ll find my opinions on the Securities Markets, Property and also Peer to Peer Lending and how I’m adjusting my portfolios in each of these categories.
The information below is comprised of my opinions on current investment market conditions and my personal actions with my investments. It should not in any way be construed as financial advice. Please do your own research before making investment decisions and do not base them solely on what you read on this website. Please read my full disclaimer of more information.
Global securities markets (usually led by the USA) have historically had a major crash on average about every 5 to 7 years for the last 100 years or more. Because of central bank intervention on both sides of the Atlantic, pumping trillions of currency & liquidity into the markets in the form of Quantitative Easing and other programs, the last bull market has sustained now for 11+ years, and almost all assets have been in a major bubble. It has been the longest bull market in history.
I have personally been expecting something big to happen for a couple of years now. I thought at the end of last year with the repo market problems that it was going to happen. Finally now it looks like the COVID-19 virus has triggered what many of us have been expecting for a long time.
We are currently in the midst of the initial panic which is crashing the markets fast. Some folks are saying the situation will be a short lived event which will pass over the next few weeks or months and things will be back to normal. I tend to disagree. My thought is that the virus is just the trigger, and this could be a big and long sustained event. Of course I could be wrong, and I hope I am wrong in this instance. This is just an opinion, I’m not trying to be a pessimist here, but economical facts seem to point to a global reset. I’m not saying it’s the end of the world, so don’t go jumping off buildings or anything, but it could be a long & serious recession.
It’s possible there could be at least a 50% overall pullback in the Dow Jones, S&P and FTSE (we are already over 30% of the way in just a couple of months). In recent history (2000 & 2008) stock market pullbacks when crashes occur (in the US markets) have been between 49% and 57%. So 50% could happen easily. Personally I think it could be much more.
In the last few weeks, the US Federal Reserve and the UK BofE has pumped into the markets more liquidity than they did for the whole of 2008. The EU is doing the same. Thus far, it’s had little effect but to pop long term bonds & gilts a little (related to the repo market intervention), and pause the stock crash for a day or so at a time. This is not a great sign as they (central banks) don’t have a lot of strings left in their bows now with interest rates in the USA & UK already near zero (and minus in Europe).
Growth Portfolios – Stocks, Bonds, Gold, REITs
Most assets in both portfolios have reacted as they normally do in a crash (see charts below for 2008 crisis), with stocks and gold drawing down initially because of the initial panic and fear of the unknown.
Stocks are the first tell of the crash as they always are. The Down Jones, S&P 500, DAX & FTSE have all already pulled back between 25% & 45% (in just less than 2 months from the highs).
Bonds are popping as a safe-haven asset as they did in 2008, however they are much more volatile this time. Because of the problems with the repo markets, US traders are not as sure that US Treasury Bonds are the solid, safe haven assets they used to be. Still, as you see in the TLT chart below (T-Bond tracking ETF), the pattern is starting out very much the same, it’s just far more volatile, faster and pronounced this time (on a percentage basis it is still close though).
Gold is being sold off to cover margin calls in stocks & commodities initially. Speculators are also dumping gold and moving to the safety of cash. Investors who understand how gold works will hold on to it as part of an overall strategy. As in the last few crashes, gold always sells off initially (see chart below) and then comes back after a while, usually to be the best performing asset of the next few years.
REIT’s have reacted to the whole crash very badly. I’m not 100% sure why. They did not act as violently in the 2008 crash (see charts below), which was basically a property based crash, so you’d think it would have been worse. You can see on the charts below that each of the funds I invest in has crashed significantly more than the stock market overall. Some more than 60%. Could this be a sign of what large property investment funds think of the commercial property market moving forward? Or is it something to do with interest rates? Either way it’s beyond my knowledge of the commercial real estate markets to understand why they have come down so much on this occasion.
Traders are liquidating assets and capital is moving in to US Dollars, the worlds reserve currency which is considered a safe haven currency. This is also normal in a crash, and offers some great opportunities for anyone who has USD’s free to invest. Cable for example (that’s what the GBP/USD pair is referred to as by traders) is at the lowest level since 1985. Assisted by the uncertainty of Brexit & the strong USD.
I believe this could be an excellent buying opportunity if an investor has any US Dollars to invest. The absolute average of GBP/USD for the last 50 years has been 1.72. It reached 1.14 yesterday. When things calm down, and Brexit is finally over and done with, there is a very good chance that the pair will return to the 1.72 average in the long run as it has for the last 50 years. Not guaranteed, but odds are it will.
The next low in Cable is 1.08 which was set in 1985. Cable has not been lower than that in the last 50 years (see 2nd chart below). Should we wait for the 1.08 level, or buy now? That’s the burning question 🙂
Euros came down hard against the USD as well. Euros can be bought for around 1.06 to the USD right now. Lowest since 2017. I think this is coming down even more, and if it gets to around 1.03 (the last low in 2017), I’ll be buying some more Euros too.
My Growth Portfolio Strategy
I never touch my growth portfolios (Stocks, Bonds, Gold, Reits) except for annual rebalancing. If you invest in similar assets, remember not to get freaked out by the huge down move, and whatever you do, I suggest you DON’T PANIC AND START SELLING. Look to the past 100 years, they have always come back, and usually quite quickly. Remember; you still own the same assets as you did before, they are just worth a little less at this point in time. You haven’t lost anything until you sell them.
Best not to look at your portfolio value for a few months. Personally I only check my main portfolio once per year, when I rebalance. I obviously update the public portfolios here every month, but my main investment portfolio, I don’t look at.
I’ve had a bunch of money sat on the sidelines for the last few years waiting for an opportunity like this (a major, all asset pullback) which to be honest I thought would have happened way before now. These don’t happen often, so it’s a great opportunity if we’re ready.
When the time is right (or at least when I’m ready & I think the time is right), I’ll go all in with the sideline capital.
What I’m looking for here is a percentage pullback in the Dow & S&P500 (the indexes that many large global traders watch). Looking at the chart below, I’ll be watching the Dow around the 15,000 mark. This number is special here, as it’s about a 50% pullback from the overall high (remember in recent prior crashes it’s pulled back between 49% and 57%).
This 15,000 mark is also a special number for another reason; it’s a 61.8% pullback of the last major move. This is an important Fibonacci level. If price just blows through this number and closes below it on a monthly basis. It has a 70% chance of pulling back 100% of the last move (to about 6,500 in the Dow, which would be very serious). So I’ll be looking to see if the Dow establishes a foothold at the 15,000 level, and puts in a base. If it does, I’ll be adding to my portfolio at that time by buying my usual basket of assets for each portfolio.
Of course, everything could bounce back way before 50% if I’m wrong about the crash. only time will tell I guess.
Peer to Peer Lending
Things got crazy very quickly in the P2P lending sector. People started to panic and pull out capital from everywhere they could, which is understandable. This created a liquidity crises with many lenders leading them to implement “Liquidity Events” and preventing investors from pulling their capital out. Assetz Capital was the first to do it. Understandably, their QAA (Quick Access Account) got hit very hard so they had to curtail withdrawals before there was nothing left. This was actually a very smart move as far as protecting their company was concerned, showing again that Assetz are ahead of the curve. It did upset a few investors though 🙄 Remember a bank run can take the largest banks in the world down, so it could kill a P2P lender very quickly.
Euro lenders are also seeing a liquidity crises, and they seem to be reacting by increasing interest rates and cashback offers to try to convince investors to keep their money in loans, and entice new lenders in to the fold. I read a lot of the forums and Facebook groups out there with young investors getting very excited about buying loans on the Mintos secondary markets at huge discounts which seem very attractive. They talk about how much money they are making, and how dumb other investors are for selling at such high discounts. I think they forget that loans only make money if they are paid back. And we are very early in this (possible) recession yet. I really hope they don’t end up learning a very expensive lesson. It only takes one large loan originator to go bang, and it will send shock waves thorough the industry.
How about defaults?
A lot of people have already lost their jobs because of this escalating situation. When people who are living paycheck to paycheck, or people with not much reserve capital (you know, people who sometimes need to take out payday or personal loans to make ends meet) lose their jobs, unsecured loans & credit cards are typically the first expenditure to get the hatchet. After all, what’s at risk? Their credit score? Big deal when you can’t feed your family.
Car loans and “luxury vehicle” loans (motor-homes, caravans, motorcycles etc.) are usually next on the chopping block, as they can be harder to repossess, so the borrower gets to use them for a while (could be several months) without having to make a payments giving them a bit of breathing space, and the hope they can find a job & catch up with the payments before the vehicle is repossessed.
The last consumer loans to default of course will be property secured loans, like homes, as people always need somewhere to live.
Business loans are also very susceptible to recession. Very similar circumstances exist where unsecured business loans will be the first to go, then asset secured loans on business vehicles, trucks, planes, boats etc. Again property secured loans will be last I would think.
Property Development Loans could also easily run in to problem as things progress, however providing LTV’s are kept at sensible levels, there is no reason capital couldn’t be repaid.
My Strategy With Peer to Peer Lending
Let’s hope that the scenarios outlined above won’t happen this time, and the end to the downturn happens swiftly. I’d be lying though if I said I didn’t have worries about how Peer to Peer lending will survive a recession.
To that end, my strategy is simple; to get capital out of lenders with unsecured business or personal loans. Put this capital in to FSCS protected bank accounts until things stabilize. It’s easy to get back in to these types of loans if things turn out to be OK, so if I’m wrong, just a bit of interest lost. If I’m correct, then capital is safe. Capital protection and preservation is paramount and comes before anything else. If you read my monthly updates, you’ll know that most of these unsecured loans are short term. I had set these short term loans to be available to pull out of if needed, most in less than 30 days. This is not yet complete, however it’s working out mostly well for now. There are one or two unexpected issues (like Growth Street freezing funds) but nothing terrible yet.
Next is to reduce exposure to other lenders based on how liquid the loans are, and how good the asset security is. Luckily I was looking for, and expecting a crash as I said earlier, so I was able to start this process early as soon as I got wind of things going awry.
I’ll go in to more detail when I do the monthly update for March. By that time I should have most things shuffled around and be able to give you a better view of how my portfolio looks. I’m least worried about lenders such as Loanpad, Kufflink & Crowdproperty right now as they have really well secured loans. Unbolted I’m also not too worried about, in fact there might be an opportunity there as pawn shops tend to do very well in recessions. Unbolted is basically a digital pawn shop and I think they could benefit hugely from any downturn in the economy.
I hope I didn’t cause anyone too much anxiety with the update above. I know a lot of people are trying to be super-positive saying this event will be over soon in order not to cause panic. I really hope they are right, but I would rather be open with my readers about what I’m thinking and why I’m taking the actions I’m taking. I always live by the old adage; “hope for the best, but plan for the worst”. It’s always done me well in the past.
The really good thing about this situation as far as Peer to Peer lending is concerned; whatever companies come out of this and are still in business and healthy will be very good, and much safer investments moving forward. If you look at many of my Lender Reviews, you’ll notice I say something like “bear in mind that this lender has not had to deal with a recession yet so we don’t know how they’ll do”. Moving forward, that hopefully won’t be needed.
I hope you found this update of interest. My Peer to Peer Lending Update will be posted at the beginning of next month as always.
If you have questions, comments or criticisms, please feel free to comment on the post or email me.
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