How has COVID-19 affected lending and stock market?

Surprisingly little, it would seem. But it's likely only the surface.

Quality platforms have been quick to respond. Some platforms such as Swaper have tightened their risk management protocols. This is necessary for them when they provide a buyback guarantee, as doing otherwise could risk them ending up insolvent.

There are definite signs of lending platforms fighting for cash. Cashback bonuses seem to be high everywhere and investors are promised ever higher rates. Robocash upped their interest rates to 14% and increased the maximum investment of private investors to 180,000 euros per year! That's quite a jump from a total maximum of 10,000.

Robocash has such a big corporation behind it, that I don't have big concerns with it, but the actions to me look like they want cash.

After the pandemic outbreak, interest rates on Mintos started to skyrocket. Why? The article claims it's because the platforms are willing to take a smaller cut? Maybe, but why would they do that? The most likely reason is that supply for cash has dried up and loan originators are in a squeeze for cash, which they try to compensate in short term by offering a higher compensation for lending money. Again, a sign for being desperate for cash.

Loan volumes have decreased

Loan originators must be desperate for cash. Have a look at how the amount of financed loans have developed on Mintos since the pandemic hit.

I'm taking loan volumes on Mintos as an example since it's big and well known. I assume it represents the whole market quite well. See how it levels off after March?

This is especially dangerous to loan originators short on cash to begin with and with buyback guarantee commitments. It is possible that such loan originators will eventually have to renegotiate their loans. I just now got a message from Mintos that Capital Service has proposed to haircut their debt by 40% and pay back in the next 8 years, with the first 2 being grace period.

This is not unexpected in the current situation. As I've mentioned in the last blog post, I still think it might be less risky in this situation to lend to loan originators that don't have a buyback guarantee (like Bondora, although such platforms are always much longer commitments), unless you go through the balance sheets and pick loan originators with good cash situation.

Stocks are risky, too

GDP around the world is predicted to plummet during 2020 more than it has since the second world war. In the US, the situation is particularly dire, as you can see from the below chart.

Yet, stock markets - again especially in the US - don't seem to remember the COVID-19 much at all.  With Shiller PE ratios still over 30, and VIX at levels similar to 2009, it's hard to have solid trust on stock market performance either. But then again, I haven't understood the stock market too well in the past few months, so maybe no-one should listen to me 😊.

It seems there are a few things at play that are creating a perfect storm that either implodes magnificently, or just fades away. If the latter happens, then those who've stayed out of the markets altogether will lose massively. If you manage to bet against the market, you might win like Michael Burry.

The way new debt has been created in the recent months is unprecedented. In 2018, global national debt reached 66 trillion. In 2020, COVID-19 added 10 trillion to that. That's a 15% hike.

I honestly don't know really what to make of that, but here are a few scenarios that come to mind what governments can do:
  1. Refinance and hope to be able to pay back, or
  2. rates go up and you cannot refinance anymore, then haircut, or
  3. inflation raises and eats your debt, or
  4. devalue your currency, or
  5. if you're in the EU, hang on tight since it's anyone's guess.
What they cannot do is not take on debt. It's just too big a gamble.

So, when central banks are injecting more debt, money will flow into equity and push the valuations up. There isn't anywhere else for the money to go. When looking at how GDP in the US has developed for example, it's hard to justify the development of stocks in the same time.

Valuation feels just way too high. Except for value stocks.

Value stocks have held up well

Value stocks are stocks that have good price-to-value ratio. Usually these are not the sexy Teslas or Amazons, but rather less known companies that have solid operations and outlook. Due to the inherent nature, picking value stocks is more tricky than just sorting a stock screener based on some KPIs, but, as it was seen already in 2008, value stocks perform well in crisis and they did so again.

This is a screen capture from the August newsletter of a paid service I've used successfully for years now. Unsurprisingly, the service is getting more and more popular during this year exactly since people are looking to find undervalued stocks, as most of the stock market is way too expensive.

As you can see, the example stock portfolio that's available to the newsletter subscribers barely took a plunge during March and has already risen above the year's starting point.

The reason I especially like ValueSignals is because it currently focuses on European stocks only. The way the US stock market performs just doesn't make sense to me and I'm hopeful the valuations will over time make a correction, especially considering how poorly the pandemic is managed in The States.

It's all about diversification

No matter where you look, there's always risk in investing. This year, most of us have felt more than enough of what it feels like when that risk materializes. And that's the price of investing. In the long term though, it's better to be in the market than out.

So how do I feel about peer lending and stock market now? I believe they all have their place. In a balanced portfolio, there should be room for many kinds of instruments. I'm going to keep it that way in my portfolio too, but during this kind of times, I am also holding on to some cash too, for opportunities.

At the end of the "Should You Hire a Robo Advisor For Your Portfolio?" I describe the "Gone Fishin" portfolio allocation. What my portfolio doesn't currently have that it should have is precious metals - not a lot at least. The Gone Fishin' portfolio is a good example of diversification and can be done easily through index funds. What it doesn't contain though at all is the new peer lending platforms.
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