Eq: Large Cap
(New York)
Investors really focused on small caps may have noticed, but others wouldn’t have. There is an odd quirk occurring in the Russell 2000 this year. A third of the index doesn’t have any profits, yet those companies are rallying 50% faster than the rest of the index. Money losing small cap stocks are up 14.5% this year versus 9.2% in profitable ones. The big question is why. Bloomberg offers no clear answers, but does say that ultra low rates have historically boosted the proportion of money losing companies.
FINSUM: Passive investing is surely helping, as all these money losing firms are still seeing their shares bought purely because of index replication. A Russell 2000 minus money losers ETF would be interesting.
(New York)
One of the weakest sectors over the last year has been asset management. If you take a close look at some top asset managers, including Invesco, BlackRock, etc, you will see that many are down 20% or more. The growth of passives, pressure on fees, and weak inflows have all combined to bring down the managers. According to Barron’s they look like big bargains. BlackRock, T.Rowe, Franklin Resources, and Legg Mason look like the good bets. There are some great payers in the group too, with Invesco and BlackRock both sporting yields over 4% and AllianceBernstein paying a whopping 8.6%.
FINSUM: Yes, the industry’s traditional model is under fire, but those with very good scale will win out. Therefore, we do think the very top managers are a good buy, especially at these valuations/yields.
(New York)
A lot of investors may be asking themselves whether stocks will be directly impacted by a trade war. In the last several trading days, the market seems to have shrugged off the increasing trade tensions. However, JP Morgan is warning that the burgeoning trade war may wreak havoc on the market. The rising tariffs now occurring globally follow 50 years of increasing free trade, so there is little modern precedent for what is occurring.
FINSUM: In our view, the market does not have a good feel for pricing the risk of a trade war because it has been so long since investors have seen anything like it. Beware.
More...
(New York)
Investors look out, it is time to go on the defensive, at least according to JP Morgan. The top strategist at JPMorgan Asset & Wealth Management, Michael Cembalest, has just told investors that the growing trade war and its threat to markets and the economy means investors need to be very worried. Cembalest points out that this will be the first sustained rise in tariffs across the global economy in 50 years and it is a profound shift away from decades of historical precedent. If the US proceeds with a further $200 bn tariff package on top of its $34 bn package, then markets could be in for a wild ride, says JP Morgan. They advise to focus on consumer staples and tech stocks.
FINSUM: This is a pretty stark warning from JP Morgan and it does make sense. Because there is little recent precedent for trade war, the market may not be accurately pricing the threat it poses.
(New York)
One of the market’s big worries over the last few years has been centered around the idea that ETFs may have some sort of implosion the next time there is a Crisis, or at least some major volatility. However, S&P has just come out with a report saying that won’t be the case. The piece cites the numerous instances of when major volatility hit markets, including this past February, and ETFs held up just fine. That said, ETFs do have the potential to be distortive, and they have been implicated in some major flare ups, such as that linked to the CBOE Volatility Index this winter. S&P concluded that “There’s not much cause for concern for systemic risk … But we have been able to quantify that there’s some minimal impact”.
FINSUM: Our feeling is that equity ETFs should be fine. However, for less liquid fixed income and other low liquidity areas, ETFs could theoretically have a “liquidity mismatch” which might cause some issues.
(New York)
Most of the indicators that the media is discussing at the moment have to do with a recession (e.g. an inverted yield curve). But today, there is an important one that speaks directly to a bear market—flows in pension funds, insurers, and sovereign wealth funds. There is a combination of factors happening which shows markets have reached the end of this cycle. On the one hand, pension funds and insurers are pulling money out of public markets in order to chase private investments (e.g. real estate and infrastructure). But at the same time, the world’s largest sovereign wealth funds are now pulling out of private market investments because there is too much money chasing too few deals. In other words, valuations have gotten too high everywhere and some of the world’s biggest investors are moving into cash.
FINSUM: When the world’s biggest investors are getting out of both public and private markets, it seems to indicate that the end of the market cycle is near. That said, this bull market has revived itself many times.