Q&As from our live online event: COVID-19 – this time it’s different?

Equilibrium’s Founder, Colin Lawson, recently presented a live online event discussing how markets are reacting to COVID-19 and how it is shaping our investment process. Whilst you can sign up to watch the full recording here, we have put together a summary of the questions asked by the viewers on the day below.

If governments can continue to throw money at the system, why did they bother with austerity and how long can this continue for?

Coming out of the financial crisis, different governments took different approaches. The US, for example, went more down the route of spending than austerity. On reflection now, many people may say that the UK’s approach of austerity was a mistake.

Having previously said there wasn’t a magic money tree to provide government workers with wage increases in real terms, they certainly seem to have found one now – maybe even a forest. It will be a very interesting debate when people come to unpick the monetary and fiscal policy of the last decade.

Looking forward, with central banks acting the way they are, they are controlling the interest rates therefore there is scope for governments to borrow significantly. So it’s more about how that money is spent.

Is it a short-term overdraft to get me to the other side of hardship or will it be directed towards long-term infrastructure projects or the green economy? If you can borrow for 10 years at very low interest rates and invest it into something that will boost the economy over the longer term then, in our view, that would be the sensible thing to do.

It’s almost the difference between a payday loan at one end of the spectrum and a 25-year mortgage at the other. We’ll just have to wait and see on that one.

Are we likely to be faced with a period of significant inflation in the years to come?

In theory, the actions taken by central banks over the past decade, injecting money into the system, should be inflationary.

We didn’t see this after the financial crisis because the extra cash didn’t really find its way into the real economy. Instead, it was largely used to bolster bank balance sheets and eventually ended up in the equity markets.

The current response seems to be more likely to find its way into the real economy as there is a renewed focus on increasing government spending. So there is potential for inflationary pressures.

However, we believe that the focus of central banks and governments is primarily on preventing deflation first and foremost. What’s more, there are long term deflationary pressures that continue to have an impact. The advancement of technology, aging populations and a weakened labour force are but a few of the shifting demographics that could keep a lid on inflation long term.

Why don’t you consider gold as a portfolio stabiliser?

Gold is a difficult asset as it is almost impossible to value it.

If we consider a commercial property that is providing a 4% yield, then we can value it. We can value the current and future value of that property and the rental yield it will provide.

Gold doesn’t have a yield. It doesn’t provide an income. In fact, you have to pay someone to find it, pay someone to dig it up and pay someone to ship it across the world before paying someone else to dig a hole and bury it again!

During stock market volatility, some people are comforted by owning gold which means that when the economic outlook is bleak, demand increases and the price increases. As it has no earnings, its value is based on the theory that there will be someone who thinks the future will be even more bleak and pay more for it (sometimes referred to as the greater fool). Trying to build an investment strategy and plan for the long term around gold is therefore quite speculative.

Given the low interest rates on offer, should I be borrowing from my bank to invest?

“Oooh… now there is a compliance trap if ever I heard one” – Colin Lawson, Founder.

Generally, we would never encourage people to borrow to invest. Whilst we may believe that, taking a long-term view, now is a good time to invest compared to cash, gearing or leveraging a portfolio leads to additional risks that the vast majority of investors would not be comfortable with.

Risk warning: The content contained in this blog represents the opinions of Equilibrium Investment Management LLP (EIM) and Equilibrium Financial Planning LLP (EFP). The commentary in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the viewer. Past performance is never a guide to future performance. Investments may (will) fall as well as rise and you may not get back your original investment.