The Known Unknowns of 2020

"What we’re seeing is a country [UK] that’s determined to commit economic suicide but can’t even agree on how to kill itself. It is an epic failure of political leadership"
- Thomas L. Friedman, New York Times

A brief recap of 2019

2019 was, in many ways, an outstanding year for equity investors but, towards the end of the year, something significant happened. When US companies reported Q3 earnings in October, investors punished companies that delivered growth at the expense of profits – something we haven’t seen for years. Companies like Twitter and Amazon, both of which delivered above-par revenue growth but below-par profit growth in Q3, were punished whilst a company like Tesla that did precisely the opposite was rewarded.

This change in investor behaviour was (and still is) particularly evident in the US shale industry. As 2019 progressed, rising output levels were no longer enough to satisfy investors who began to demand black numbers on the bottom line. And, as we all know, profits are not easy to generate when WTI trades in the $50s, whilst structural reasons ensure no profitability amongst (most) shale producers unless WTI trades in the $60s or higher.

Well, I wrote those lines before I went away for Christmas. After the dramatic worsening of the US-Iranian relationship in early January, WTI is now very much in the $60s. Going into an election year, considering how much of Trump’s campaign funding comes from Texas (see for example here), it is not beyond me to think that domestic issues also played a role when Trump decided that the Islamic Republic’s most celebrated military leader, Qassem Soleimani, should pay the ultimate price, but more about that later. Let’s go back to the recent change in US investor behaviour.

Credit markets behaved quite similar to equity markets last year. Following the US Congress’ decision to raise the debt ceiling on the 26th July, AAA-credit was suddenly in demand, whereas investors were net sellers of CCC-credit from August to December. Likewise the leveraged loan market which was under considerable pressure in late 2019 with issuance in Q4 down 40% year-on-year.