Real assets are the perfect investment for 2021

Real assets are the perfect investment for 2021

07 January 2021 from Mikael Syding

The 2010s became the decade of division. It was the decade when the rich got richer faster than ever before, and when the victorious platform companies on the stock market bought up their competitors and left the old economy far behind.

In 2020, the trends accelerated with fire support from the pandemic billions that were uninhibitedly sprayed over the financial markets. When money is free, cash becomes an unwanted hot potato that must be thrown away at an ever faster pace, while real assets have no real price cap. After all, money cannot be used for anything other than marking exchanges between real values (such as food, housing, communication tools and entertainment).

Among other things, the Covid pandemic changed the view of what constitutes a real asset - from, for example, physical commercial properties to digital meeting places. At the same time, the QE measures kept interest rates around zero, which through risk-parity balancing means that the total market value of shares must be higher to match the higher total value of bonds. In addition, many investors lowered their discount rates, which meant that loss-making companies with hopes of gains well into the bright future could be valued. When the discount rate approaches zero, ie when money is free, the sum of the value of future potential cash flows goes to the moon. The end result is that you stop measuring real values with worthless FIAT money and start again with some other financial accounting system. Admittedly, there is a long way to go before fiat currencies and for example cash can be scrapped completely, but major societal change processes are already in motion. They do not affect the coming year's investment decision very much, but with each passing year, it is important to be more and more prepared for a turning point. QE pike with inflation, higher interest rates and rapid price falls can be difficult for many to navigate.

The FANG companies, which are now called something else and include Microsoft, Spotify and several A's, quickly discounted our new digital habits after the initial lockdown shock. So did teleconferencing systems such as Zoom and the home training company Peloton. Computer games and betting companies have also rushed upwards. The losers were quite logical among oil companies, banks and real estate. This year's big winner was Bitcoin, however, and for a while gold and gold mines also seemed to shine this year. Not because overall things went particularly badly for gold - both the raw material and the mines hit the stock market, but Bitcoin deducted about ten times.

The patterns from 2020 can probably be largely repeated in 2021. First, the winter pandemic measures and certain logistical difficulties in distributing the sensitive vaccines make the economy shut down more than expected. It pulls the stock market down in the spring, if the central banks, I think, react a little too moderately in the beginning. But when single-dollar trillion stimulus turns into five-trillion stocks, the stock market and Bitcoin pull up again, initially with the same CATCH as a former leader.

The difference is that now the state is tired of Facebook's and Alphabet's monopoly shapes, so with the decade of regulation in the making, the advertising platforms are losing their luster - this is not least due to the high profit multiples, especially if interest rates rise. At the same time, there is reason to believe that physical real assets such as land, agricultural raw materials and all kinds of metals become increasingly attractive as free money swirls around. Physical communication networks can also be good investment alternatives. Yes, cables, transmitters / receivers and satellites are central for the CATCHER to have somewhere to be at all. Maybe the power is shifting from social media and advertising companies to the communication networks themselves, the telecom companies?

If real assets rise in price, consumer price index (CPI) and producer price index (PPI) inflation are not far away. And when it picks up, sooner or later money supply inflation and asset price inflation will be transformed into rising prices for goods, services and wages. "Inflation" then. It is still a long way off, but as the direction becomes clearer, rising interest rates can be expected. Then the losers become bonds and high-multiple companies, and the winners are those who have real assets in the form of e.g. information networks, mines and energy. Gold, gold mines and in particular Bitcoin will have a special position before the transition to a new way of arranging and measuring the terms of trade for the world's real assets. Dr. Copper also signals unusually strongly that the 10-year interest rate has a large upside (alternatively that the copper price will fall sharply, but it is less likely if the economy will soon start up again after the last shutdown).

The oil companies are hardly the absolute best inflation hedge, but the sector is depressed and unpopular in these ESG times. In particular relative to the technology sector (MFANGS etc.). This could pave the way for at least a relative revaluation in relation to high-multiple sectors that will be penalized if the market only anticipates higher interest rates in the future. Gold mines are also very cheap in relation to the price of gold, so if it turns out that I think the gold price will rise by 20-25% also in 2021, many gold mines can double in price during the year. Furthermore, if the electrification of the world is to meet the environmental goals, more battery metals and copper are required than anyone is prepared for, so there are good opportunities in almost all mining industries. Maybe silver and silver mines will be the winners in 2021, while gold and copper will be tough at a more "moderate" rate of 25%. The more I think about it, the more raw materials look like the perfect asset in 2021.

But against the ultimate money, Bitcoin, not even real assets seem to have a chance. For Bitcoin, it is currently undergoing a transition from a niche asset of less than one trillion dollars to becoming an equivalent asset next to shares and bonds of 100 trillion (100 "trillion" in English). Then it's not so strange if the price is tripled or so for a couple of years in a row. Pay special attention to the banks in that environment. Fintech and Bitcoin are slowly eating up the banks' raison d'être. It is still slow, but in 10 years the game plan will look completely different. Yes, higher interest rates result in better bank margins in the long run, but in return credit losses become large immediately and loan volumes shrink.

Apart from that, the main message is that 2021 can be like 2020 with a nice buying situation in the spring. But this time, the focus can be on real assets such as mines, real estate, food, cheap goods and telecom in front of high-multiple companies with hope-based business models, regardless of whether it is FANGS, home training or so-called API companies in virtual shopping. In the slightly longer term, one should not forget the ultimate real asset, military power and defense companies in an increasingly fragmented and troubled world. That may be the theme next time.

@Mikael Syding

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06/12/2021 05:43:21

 

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