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Where's the Money?!

Optimism was back in the stock market this week after the prior week's declines. Most major stock market indices ended this week having recorded gains in the region of 3-5%, effectively recovering most of the prior week's losses. 

This week's upturn was driven by increasing optimism that the US and China will follow through with the "Phase One" trade deal signed last December, and a summit of European leaders yesterday which was the first step towards agreeing what seems likely to become a historic fiscal spending plan.

Where's The Money Part 1: European Summits

European leaders held what has been described as a "stepping stone" summit yesterday via video conferencing in order to discuss the fiscal spending plan we've covered in previous editions of this newsletter. 

The scope of this (very) socially distanced summit was limited in nature, with leaders including Christine Lagarde, Angela Merkel and Emmanuel Macron attempting to "rally the troops", so to speak. The idea was to get European leaders on board, in principle, with the proposed spending plan before a formal in-person summit to be held over the course of July (date TBC) - at which it is hoped that all member states reach an agreement with respect to the specifics of the fiscal spending plan. 

A large part of the job will involve persuading the "frugal four" (Sweden, Denmark, Austria and the Netherlands) to buy into the increased fiscal spending. The plan has so far been opposed by these fiscally conservative countries primarily due to the fact that it includes a potentially historic move to raise debt jointly on behalf of all 27 countries and then redistributing the proceeds to countries in need - such as Italy and Spain - in the form of grants and concessionary loans. This would leave richer northern European countries on the hook for debt which is spent by their southern European counterparts. 

Other issues being debated at the moment include exactly how much the EU ends up borrowing, the timing of repayments, where the money will be borrowed from and exactly how the funds will be allocated.

If they can pull this off, it would mean a much closer European Union over the long run - until now the bloc has largely been united with respect to it's monetary policy, with the European Central Bank setting interest rates and executing quantitative easing for the whole region. A move to issue joint debt would bring the block one step closer to forming a fiscal union. Time will tell whether that's a wise move, but it seems right now it's necessary to cushion the COVID-19 blow being experienced across European economies.

Stock markets seem supportive of the proposed spending plan, with the Eurostoxx index having gained around 13% since the plan was first announced. If this fiscal spending plan fails to materialise, it would be reasonable to expect European stock markets to erase these gains which have been fuelled so far by optimism that a deal will be done. On the flip-side, it might also be reasonable to expect European stock markets to rally further from these levels if the plan is unanimously approved by all member states. 

Clearly, for those invested in European stock markets, a lot rests on the outcome of these discussions.

Where's The Money Part 2: Wirecard

While European stock markets hang in the balance, we wanted to end this week by highlighting the value of diversification for all you budding investors out there.

This week, we saw a textbook example of idiosyncratic (a.k.a. company-specific) risk rearing its ugly head in the form of Wirecard AG, a Germany payments processing and financial services company which saw it's stock lose over 70% of it's value, going from around €13bn in market cap to around €3bn over the course of one and a half days.

On Thursday, the company announced that it's auditors were unable to locate €1.9bn in cash (we wonder if they've checked under the mattress) and as a result the company was unable to publish it's annual report, due yesterday.

The €1.9bn was thought to have been held in escrow accounts at 2 banks located in the Philippines - those banks have since confirmed that Wirecard was never a client, hinting at some potentially serious fraud taking place beneath the surface.

The fallout has just begun, with a lot of uncertainties around the situation at the moment, but it has been spectacular so far. We've provided a quick summary of what's happened in the two days since the news broke to get you up to speed:

  • Ex-billionaire Markus Braun, the Wirecard CEO, has resigned, having led the company since 2002 from fledgling start-up to one of Germany's biggest tech companies.

  • Long term investors and supporters of the company bailed, dumping large chunks of stock into the market, driving the price crash you see when you google "Wirecard share price"

  • More than 15 commercial banks from across Europe and China who have lent large sums of money to Wirecard have the option of recalling those loans given the company was unable to publish it's annual report on time. This seems unlikely as it stands because a call on the company's loans would force it into bankruptcy and force banks to write off the bad-debt. Nonetheless, the banks have begun working with auditors, advisors and probably lawyers to see if this crisis can be abated.

  • Softbank's prior support for Wirecard was called into question, adding pressure on the Japanese giant which is already dealing with the fallout from the Vision Fund's multiple loss making investments (WeWork is another recent example).

  • There are many other questions which have been asked over recent years related to potential accounting fraud at the company which are now resurfacing as we speak.

Admittedly, f***-ups of this magnitude are exceptionally rare when it comes to large cap companies, but when they happen, they usually end up being pretty spectacular. 

The situation is currently fluid, and there are so many unanswered questions at the moment which will likely be answered over the course of the coming weeks. We'll definitely be watching closely as this situation unfolds and we suggest you follow along too, whether it's for investment education or purely for entertainment purposes. 

Taking a step back, we think this is exactly the kind of reason why, if investing for the long run, it's always wise to check that you're not overly exposed to any one risk factor in particular. In this case, the loss-making risk factor was company-specific risk, but it can also be industry risk, geographical risk or political risk just to name a few.

That's why, no matter how you do it - whether you spread your eggs across geographical baskets, industry baskets, company size baskets or all of the above, and whether you do it by picking your own basket of investments or buying funds which do the work for you - diversification is the ultimate antidote to risk when it comes to building your investment portfolios.

Check out our library for more on diversification here. We've also spent some time looking at risk, which you can find herehere and here

Until next week! 🥤🍿

Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.

Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.

This content is copyright protected by Evarvest Limited (12544579). Evarvest Limited refers to the Evarvest network and/or one or more of its subsidiaries, each of which is a separate legal entity. 

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