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Tailpieces Blog Post 265
Investing in Europe
Investing in Europe
There are four reasons why international fund managers’ pessimism about Europe could be wrong, argues JP Morgan’s chief market strategist for the region, Karen Ward:
► When Covid-19 vaccines have been rolled out everywhere, the global recovery is likely to be strong. Governments’ stimulus plans have stoked household savings. When pandemic restrictions are removed, consumer demand is likely to soar. Export-dependent economies are likely to be the main beneficiaries. Europe’s should benefit disproportionately since recovery is expected to be dominated by spending on luxury items and capital goods, where it is well represented.
► Increased global momentum towards tackling climate change may lead to a race towards renewables. Many of Europe’s companies are already ahead of the curve: three-quarters of global wind assets have company headquarters in Europe.
► At some point the US Federal Reserve will have to signal its inclination to taper its asset purchasing. When the prospect of deeper negative interest rates recedes “I would expect financials to outperform technology and therefore value stocks to outperform growth companies.” This rotation should favour Europe, which has relatively more financials in its indexes, relatively fewer tech stocks.
► The pandemic has strengthened Europe’s institutional architecture. The European recovery fund has gone a long way towards fixing the flaw of a single currency without a fiscal union.
“While certain segments of the global market look incredibly frothy, Europe still seems to be suffering from a case of excessive pessimism.”
Since November 9, when news broke of an effective Covid-19 vaccine, cyclical assets such as commodities have surged in value, signalling market expectations that businesses generally are going to improve. Container freight rates have risen to all-time highs. Oil prices have topped $50 a barrel.
Interest rates are low and expected to stay that way for years. Markets suggest that future inflation is likely to remain low, too. The rise in share prices alone, heralding the return of growth and profits, “is probably not enough to indicate a mania.”
Eoin Treacy says that despite much talk about bubbles and late-stage activity, “not everything is in a bubble.” Valuations remain attractive in the world’s highest-growth economies, which also have the best demographics. Dollar weakness will make them relatively attractive.
The UK, Europe, Japan, Taiwan, South Korea, Vietnam, Thailand, Indonesia, Singapore, India and China all have stock markets that are breaking out of long-term ranges on a constant-currency basis. “Base formation completions generally signal the beginnings of new bull markets.
“The conclusion… there is clear evidence a mania is evolving – but there is no evidence it has reached its peak.”
Top Pick in the Frontier Markets
Top Pick in the Frontier Markets
HSBC bank says Vietnam is its “most preferred” frontier market. A frontier market is one that is more developed than least developed countries, but too small, risky, or illiquid to be classified as an “emerging market” economy.
HSBC says the Southeast Asian nation is “more investable than many think.” Its positive factors including an accelerating inflow of foreign investment, a government focus on infrastructure development, structurally increasing purchasing power, and strengthening banks.
“Profitability, attractive valuations, strong balance sheets and market reforms point to the likelihood of a multi-year bull run.” Inflation is low, the currency is stable and corporate earnings are healthy.
HSBC disagrees with the common perception that Vietnam’s equity market is too small, pointing out that it now has 11 stocks with a market cap of more than $5 billion. It had only two in 2015. Trading now runs close to $1 billion a day.
The government has passed new laws that should reduce restrictions on foreign investors and put Vietnam in line for upgrading to emerging-market status. Covered warrants and other developments are helping overseas investors gain exposure to companies at their foreign ownership limits.
The potential for elevation from frontier to emerging-market class will make Vietnam much more of an investment play for international funds. Saudi Arabia was so reclassified early in 2018. Investors began pricing in that upgrade well ahead of the announcement.
Vietnam’s stockmarket is on the cusp of breaking out to new all-time highs. It has been consolidating below its 2018 and 2007 peaks for the last couple of months and retested the highs a few days ago.
Where to Find the Opportunities
Where to Find the Opportunities
Ark Investments, a specialist in high-growth technologies, say the five main platforms of innovation that it expects to transform the global economy are DNA sequencing, robotics, energy storage, artificial intelligence and blockchain. These involve 14 technologies that include gene therapies, 3D printing, cloud computing, big-data analytics and cryptocurrencies.
Chief executive Cathie Wood says transport is one of the industries most at risk from disintermediation (cutting out of intermediate processes). Road transportation, railways and airlines are likely to capitulate to the convergence of several technologies and deliver a collapse in their cost structures.
According to Ark’s estimates, electric vehicle sales will increase 20-fold globally during the next five years from 2 million and about 2½ per cent of the market to 40 million and about 45 per cent in 2025.
Traditional healthcare is also likely to give way to convergence of next-generation technologies.
We are going to see disruptive dislocation of industries “the likes of which we have not seen since the telephone, electricity and the automobile burst on the scene in the Roaring Twenties.”
The Place to Find Rebound Opportunities
The Place to Find Rebound Opportunities
Japan’s companies are the ones most geared to benefit from the world’s powerful rebound in economic growth, according to a new report by Jefferies.
The Atlanta Federal Reserve predicts 10 per cent growth for the US economy in the current quarter driven by unprecedented demand as it emerges from the pandemic. As Americans were forced to spend less due to lockdowns their personal savings ballooned – more than 20 per cent of disposable income. They have accumulated a huge pool of cash and borrowing potential which they are starting to spend. Similar build-ups of spending power have evolved elsewhere: latest figures are for household savings rates of 25 per cent in the Eurozone, 22 per cent in Japan.
Good news for corporate profits.
Jefferies forecasts that the best boosts to operating leverage will be in Japan. It’s the global market that I reckon is most underestimated by international investors. Currently my personal holdings are the optical products giant Hoya, the e-commerce distributor MonotaRO, the staffing agency business Recruit Holdings, semiconductor equipment manufacturer Tokyo Electron Ltd, and robotic systems maker Yaskawa Electric.
Three Big Reasons Why Capital Will Lose Share
Three Big Reasons Why Capital Will Lose Share
Labour’s share of national income – what’s paid out to workers in wages and benefits – has been falling in the US and many other developed economies since the 1980s, while capital has gained share. There are three big reasons why this is about to change, says Rana Faroohar:
► The Biden administration has invoked the Defense Production Act to force the private sector to speed up vaccine production and distribution. This will immediately create more demand for jobs – a trend that could continue beyond the pandemic as there are calls to strengthen domestic supply chains for other pharmaceutical products, and for food.
► There is a trend towards increased unionization, particularly in high-growth industries such as technology.
► Global demographic trends that have disadvantaged workers are finally reversing. Birth rates in most countries are falling. Geopolitical and economic shifts have led some countries to create more independent supply chains. Baby boomers are ageing – making the healthcare industry a huge job creator. Six of the ten jobs that the US government expects to grow fastest in the next decade are in nursing, therapy and care services.
Why There’s a Boom in Property
Why There’s a Boom in Property
There’s a gathering momentum in residential real estate. In New Zealand home prices in January were 13 per cent up over 12 months. “This is a familiar story from all over the world,” Eoin Treacy says in FullerTreacyMoney.
There is low supply because many people are worried about moving during a pandemic. At the same time there is increased demand because other people feel they have more cash and need to move because of personal circumstances. So prices are rising, fuelled by record low interest rates for mortgage loans.
As the global economy picks up, supply and demand should come back into some form of equilibrium and the pace of price increases should moderate.
“What we are [also] seeing is another market which has been accelerated by the pandemic. The mass migration [in America] of thirtysomethings to the suburbs and other less expensive/better quality of life cities, and the delayed downsizing of elderly people, has created a unique set of circumstances. That is unlikely to persist indefinitely. Meanwhile, there are certainly opportunities for a fresh crop of young people to move to big cities which are now trading at a discount.”
Politicos Want to Rein In the Giants
Politicos Want to Rein In the Giants
Shares of Big Tech peaked in September because investors anticipated a rotation into cyclical stocks such as banks and energy. But another reason, says Jefferies’ commentator Chris Wood, was anticipation of “significant regulation of Big Tech in the next five years, despite the extremely close relations between Silicon Valley and the Democratic Party establishment.”
There are plenty of initiatives under way to rein in Big Tech.
The Federal Trade Commission has accused Facebook of unfair competition and asked a federal court to break it up.
The European Union proposes to impose sweeping new rules forcing Big Tech to take more responsibility for policing content of websites and to refrain from anti-competitive practices, or the giants will face being broken up.
In Australia Google and Facebook have been forced to compensate traditional media for use of their content, setting a global precedent.
Exploding Personal Wealth in the Asian Tropics
Exploding Personal Wealth in the Asian Tropics
Southeast Asia’s largest economy, Indonesia, is expected to see 67 per cent growth of its people becoming ultra-high-net-worth over the next five years, according to British property consultancy Knight Frank. That’s those with personal wealth, including the value of primary residence, of more than $30 million.
It’s not just the super-wealthy who are doing well. According to the World Bank Indonesia’s middle-class consumption has grown at an average annual rate of 12 per cent since 2002 and now accounts for almost half all household consumption.
The richer Indonesians get, the more they spend on cars, health, education and other services.
Asia is the region where personal wealth is growing fastest and is already home to more billionaires than any other – 36 per cent of the world’s.
Where to Seek Profits in Mining
Where to Seek Profits in Mining
Canadian billionaire Pierre Lassonde, who made his fortune from gold discoveries, says the best kinds of mineral deposits to find today are those that contain copper ores associated with gold and/or silver such as Indonesia’s Grasberg mine.
“Copper is the metal of the future.” Lassonde says, because of its increasing importance in generation and distribution of electricity and its use in transportation (electric vehicles) and communications. “With the emphasis on greening the world, we’re going to use more copper.” It’s “the fundamental basis of our civilization, and it’s going to get better.” Gold and silver are “also part of the greening of the world,” so the three metals are the place to be.
Because copper is central to demand for renewable energy resources, but it takes a long time to increase supply, it can be argued that we’re in the early stages of the next major secular market in commodities.
Where Growth Is Strong
Where Growth Is Strong
The pandemic hasn’t brought any new trends in economic life but it has accelerated existing ones says the renowned British fund manager Terry Smith. He lists these examples:
► E-commerce;
► On-line working from remote locations using the cloud or distributed computing;
► Home cooking and food delivery;
► On-line schooling and medicine;
► Social media and communications;
► Pets – which have become more important in isolation and when their owners are more at home;
► Automation and artificial intelligence.
Tailpieces
Tailpieces
Greenery: The Japanese government’s new energy plan, which will ban the sale of new petrol-only cars by the mid-2030s, will have disastrous consequences, Toyota boss Akio Toyoda has said in a rare public attack on official policy. If all the cars today were electric vehicles, that would require ten extra nuclear plants to avoid electricity shortages during the peak summer period — when so much power is needed for airconditioning. Nuclear is extremely unpopular in Japan as a consequence of the Fukushima disaster.
The government’s new plan calls for use of renewables to increase from 18 per cent of electricity supply to as much as 60 per cent by 2050, with the balance to be generated by nuclear and thermal plants using carbon capture technology.
Death mysteries: According to official statistics there were 2,916,492 deaths in America last year from all causes, or 91,654 more than in 2019. But there were supposed to be some 400,000 deaths attributable to Covid-19. It seems that some 300,000 people conveniently ceased dying from other causes such as heart failure, car crashes and cancer. Another mystery is that, according to the Centers for Disease Control, deaths in the US from influenza dropped to almost zero in the last flu season, down from 56 million the previous year.
Can you believe this, or indeed anything else, about what we’re told about the pandemic?
Global warming: The carbonatics stopped using this phrase to frighten you into abandoning cheap and reliable oil and gas as fuels when it became clear that the solar-led warming cycle was no longer evident. Now the enemy is “climate change.” It’s easy to blame every freak weather event on that, as climate always changes.
Whether or not it’s caused by human activity driving up atmospheric levels of carbon dioxide is something else. William Engdahl, a commentator on geopolitics, says the gas cannot soar into the atmosphere from car exhaust, coal plants or other manmade origins, as is claimed, as its molecular weight is 44. It’s heavier than air, which has a weight of only 29.
Interest income: Banks have traditionally encouraged customers to deposit money with them, but no longer. Germany’s biggest banks have negative interest rates. They charge interest on large deposits.
The money bubble is a consequence of governments creating much more than is needed to finance business activity. It’s a disparity magnified by the pandemic. Savings rates rocketed with consumers at home. Huge relief programmes have flooded banks with excess deposits.
With banks offering nothing, or worse, people are forced to accept relatively high-risk income sources such as equities and real estate.
American taxes: The new federal government has quietly clamped down on tax avoidance by huge numbers of gig workers. It slipped a section 9674 into the Covid relief law that requires platforms for contract workers such as Uber and Airbnb to report incomes to the IRS. Up till now a gig worker could earn up to $20,000 on these platforms without the IRS being informed of their incomes. Now the threshold for this exemption has been cut to just $600. As a result the IRS expects to collect an extra $1 billion a year from the poorest gig workers.
Iron ore: China, whose steel industry is the world’s biggest, plans to slash its reliance on third parties for iron ore amid soaring prices of the raw material and a burgeoning trade/political dispute with top supplier Australia, raising from 30 to 45 per cent of its needs, supplies from sources that China controls.
A key to the five-year plan will be Simandou in Guinea, the world’s largest untapped iron ore deposit, which several of China’s biggest state-owned firms are close to getting the go-ahead to develop.
Interest rates: The US central bank cannot allow them to rise. The knock-on effect of two percentage point increases would add $100 billion to the annual cost of servicing government debt. That would require big tax hikes – which are politically impossible as there is no public tolerance for austerity.
That’s why the stock market remains firm.
Hong Kong: China’s taking of full control of the territory when it imposed the National Security Bill is a positive for investment as it “now effectively owns Hong Kong and will want its economy to prosper” says Chris Wood, Jefferies’ locally-based global head of equity strategy.
China v America: The US share of the world’s annual output in purchasing-power terms declined from 20.5 per cent in 1999 to 15.9 per cent in 2019 while China’s rose from 7 to 17.4 per cent, according to the IMF.
The end of Communism: Cuba has scrapped most of its old Soviet system by allowing the private sector to practise more than 2,000 professions that have been reserved for state employees.
Stock markets: Currently there is no evidence of either of the two conditions that could trigger a major bear market – a collapse in earnings and/or monetary tightening.
