Either QE will end, or it will lose its magical powers

Today’s edition of 20/20 Vision comes from our in-house analyst Kit Winder.

Now Kit and I enjoy having the biggest differences of opinion here at Southbank Investment Research. But for once, he’s penned a decent set of predictions and prognostications… for the most part.

Many people are confused by our differing editorial positions. Not just between Kit and I, between all of us in the editorial team. But our long-term loyal readers simply love seeing such disagreements.

It makes us work harder for you. We have to research deeper, think more carefully and explain more clearly what our conclusions are when we’re disagreeing. It keeps us honest.

It’s for you to decide who you agree with in the end, after all. We don’t go on to manage your money for you.

It’s also more fun to wind each other up a little every now and then… and Kit is quite a winder.

An offer like that is how I came to work here.

Best wishes,


Nick Hubble
Editor, Southbank Investment Research

20/20 Vision
A Q&A with Kit Winder

Kit, what would be your headline to sum up 2019?

Markets rally on trade war hopes
Rally boosted by recession indicators, Fed likely to ease

You have 100 words to prepare investors for 2020 – what are they?

In a game of musical chairs, the markets are dancing to the tune of the Federal Reserve’s quantitative easing (QE) programme. This year’s strength in US stocks was particularly extreme because the year started after a hefty pullback, and was boosted by a restart of QE in the US.

It would seem that there is “only one stat that matters” – the size of the Fed’s balance sheet. It is no coincidence that the S&P 500’s deepest fall since 2008 coincided with the only sustained shrinking Fed assets in the same period.

Watch out when the music stops, there may not be enough seats for everyone.

What was your most successful prediction of 2019?

It seems silly to say it now, but Tesla’s crash from the 300 range to below 200.

The original catalyst was a near $1 billion debt repayment that was falling due in Feb/March, and there was a heap of bad news and bad press that hadn’t really caught the market’s attention. The company was shedding management, expanding its losses and debts every quarter, cutting margins, involved in scandal and so much more.

Of course, it’s now delivered some more promising results, and regained some momentum. I was amazed by how many Teslas I saw during my week in Shanghai, and have learned a valuable lesson in general – things rarely go to zero, so don’t be greedy.

For now though, I maintain that it’s a long way from a stable, profitable business, its valuation is unrelated to reality, Elon is more of a marketing and fundraising genius than anything else, and that it will not stay this high forever.

What surprised you most in 2019?

The onward march of the markets. Earlier in the year we had trade wars, declining economic indicators, yield curve inversions, at the back end of the longest bull run in history with all kinds of measures at cyclical or all-time highs. Mean reversion is a law, it cannot be broken and will come inevitably, but I was convinced it would come this year – and I was wrong.

In general, financial engineering (which it is – valuations are now further removed from corporate profits than at the height of the 2000 tech bubble), leads to levitation, but gravity inevitably applies its relentless force. Either QE will end, or it will lose its magical powers. One way or another, correction will come – and the longer this distortion goes on, the worse it will be. Higher the pedestal and all that.

What is the biggest opportunity of 2020?

Renewable energy stocks.

Though that could have been said for each of the last decades, and will remain true for the next one or two…

Problem is, finding the right ones. It really is incredibly tricky. Profitability is rare, and valued very highly already. But this year, with Greta Thunberg and Christine Lagarde putting climate change on the minds of the public, and of central bankers, we could start seeing unprecedented support for the solutions to climate change.

ESG (environmental, social and governance) has been a very vague attempt to do this, but isn’t funding the companies that are offering technological answers to our environmental questions. I think the network effects will continue to build for both the technologies themselves, and investors.

That, or bitcoin, which similarly is equally fraught with danger.

What is the biggest threat of 2020?

To investors’ portfolios? Recession, for the reasons outlined so far, among others.

Keep an eye on Fed asset purchases, Hong Kong’s peg to the USD, China’s economic growth and bankruptcy rates, house price-to-income ratios, valuations on US tech stocks and bond proxies, negative yields and yield curve inversions….

Name a trend from 2019 that will continue into 2020.

Cybercrime, and cybersecurity. The numbers in this industry are staggering. The amount that we don’t see and doesn’t get reported is way beyond what people think is possible. Both as a weapon of criminals and states, and as an asset class for investors, the cyber trend has a long way to run.

The shift to fiscal stimulus aiming for growth, rather than austerity aiming for reduced deficits.

Name a trend from 2019 that will reverse in 2020.

Momentum – in both its financial and political forms.

The election spelt the end of Jeremy Corbyn and while he will attempt to leave a legacy of far-left socialism back by his Momentum supporters, centrism and electoral sense will win out.

In the financial markets, momentum has been ruling the roost for so long that grads aren’t even taught to “buy low, sell high” any more – just buy high, sell higher.

Factors don’t outperform forever. Led by some of the FAANGs, cracks are starting to appear. Value’s time in the sun is near, if it hasn’t already begun.

What were the key moments of 2019 in shaping 2020?

China giving certain privileges to Macau, the casino island, explain that the times when Hong Kong got all the special benefits are over. If the Communist Party can’t retaliate with force as it would like to, perhaps policy can be a subtler and more potent weapon to punish the protestors.

How do you think 2019 will be remembered?

The melt-up before the end of the longest bull market in history.

Oh – and England winning the cricket World Cup “by the barest of all margins”.

How will the 2010s be remembered?

The Second Appeasement.

I fear China, and I fear that Wall Street and the West have been so desperate for a slice of that sweet sweet growth that we have been led to ignore what is happening. With the trade war, Hong Kong and Xinjiang, I feel that is coming to an end.

That – and widening inequality caused by central bank policy (or in most people’s eyes, austerity) in the UK. Asset prices have risen, wages have stayed flat. Unemployment has fallen, but they are often jobs not worth having.

What will the 2020s be remembered for?

Action on climate change. I don’t know how effective government policies will be, but they will come. Solar panels on most homes, decommissioning of coal plants, acceptance of nuclear, electric vehicles (EVs) taking huge bites of the car market.

This year, Greta Thunberg was Time magazine’s person of the year, and Christine Lagarde became head of the European Central Bank on a platform of getting EU governments to spend, and saving the world (obviously).

Which financial indicator will you keep an eye on this holiday season (and why)?

The Fed’s balance sheet purchases, for the aforementioned reasons. That, and bitcoin, which is just generally fascinating to follow, even for a novice like me!

What do you think the financial impact of the new government will be?

My hope is that the damage of Brexit is so slow and drawn out that we gently adapt and adjust to the new realities.

The Conservatives are shifting from austerity to some small increases in spending: on education, the NHS, the police, meeting the 2050 climate targets and controlling immigration.

Depending on how Brexit is handled, the pound still has quite a way to go before it gets up to its pre-2016 or pre-2008 highs. I think the UK could be underappreciated, and increased investment will push the pound into a multi-year upward trend, meaning the FTSE 250 outperforms the FTSE 100 which earns more of its revenues abroad.

But that really is just guesswork at this stage.  

What was the best book you read in 2019?

Factfulness by Hans Rosling. In a world dominated by bad news, bad information and a perception that things are getting worse, Rosling’s using of data and statistics, combined with his jovial and positive outlook, remind us that over most timescales longer than a decade, every single measurement of wellbeing is on the up.

Globally, girls are now in school for nearly as long as boys. Life expectancy is going up, the number of people in poverty is coming down, deaths from natural disasters and outbreaks of disease have halved, more people have electricity, birth rates are stabilising to around 2.1 babies per woman, vaccinations are up dramatically, and plenty more.

That doesn’t mean that things are good by any means, and there is a hell of a lot more to do and to improve – but things are getting better, and it’s important to remember that.

Which newsletter should Southbank Investment Research launch in 2020?

The African Advantage

Helping UK investors learn how to access and profit from the rise of Africa.

Will next year be a good year for renewables?

Yes, unless there is a recession.

With the necessary caveat that as it is made up of many nascent industries, there are plenty of new ideas and business models out there that are promising, but will ultimately prove to be misguided or just unlucky.

What are you most worried about?

War with China and a parallel to the 1930s.

After the crash of 1929 and the Great Depression, interest rates were lowered and money was printed. The wealth gap widened and a new world power was rising to challenge the incumbent.

The parallels with the last decade are startling. In China, we have a rising power threating to spring the Thucydides Trap once again, as the US scrambles and scraps to maintain its post-WW2 global hegemony.

Central banks contemplating negative rates and Modern Money Theory (MMT) suggest a lack of space for policy to address the next crisis, and central bank/government policy has pushed asset prices up, leaving wages behind and causing the wealth gap to widen.

As China/US rhetoric ramps up, and the longest bull run in history gets inflated ever further from growth in corporate earnings, the parallels unnerve me.

What are you optimistic about?


Rising earnings, low valuations, cultural shift towards more shareholder-friendly governance, heavy government support for growth.

These aren’t just supportive for investment returns – they are also nearly unique in the developed world today.

Category: Commodities

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