Hi everyone, and happy New Year. We’re well and truly into 2020 now, and just on three weeks in, it’s been quite a ride already! 2020 has made a roaring start on a whole lot of fronts:
The theme so far for the new year? Up, up up! To slightly frightening heights, actually: the S&P500 is now trading at an average of 25x earnings. Which is the highest it’s been since the early 2000s. What’s driving the sentiment? Turns out quite a lot:
- Trade tension is declining, in particular the phase one US-China agreement being signed, and political deadlock in the UK looking to be resolved.
- “Not QE”: the US Fed has been purchasing short-term securities at scale since late last year, which has been increasing liquidity and supporting asset prices.
- Interest rates forecast to remain low for the year, and options for yield are limited – pushing more investors into riskier assets such as equities.
- US Consumer sentiment has remained strong.
- In New Zealand, business optimism has been picking up, and after a couple of years of slow property growth there are signs of seeing sales activity starting to lift.
What to look out for over the coming year:
- Earnings performance – the big US banks have reported, and they’ve mostly been strong. Further results will provide support for – or undermine – current levels of valuation. Apple, Tesla, Facebook, and Microsoft are some big names still to report in January.
- Further trade developments. Goodness knows with this one. Phase 2 of the US-China deal isn’t expect for a while, and who can say what will happen between now and then? In particular look out for emerging tensions between the US and the EU over taxation of digital services.
- Elections – two to look forward to this year! One and home, and another – closely watched, to understate things – in the US. What would a Democratic President look like? Or Trump Part II?
The overall message though here is: picking the short-term direction of markets is a fools game (exhibit one: all the asset managers who moved into fixed income and cash early last year). The most important decision in your portfolio is your asset class allocation strategy relative to your investment timeframes and risk appetite, which should be reviewed and updated on a regular basis. Trying to tactically vary how your portfolio is allocated based on where you think markets will head in the short term is generally a losing strategy.
The worlds most valuable car company?
Tesla has had a rip-roaring run in the past jumping from mid-$200’s per share to an all-time high of $569 per share this month (so far!), and a market cap of just over $100Bn. Given that Tesla is one of the most shorted stocks in the US, it’s undoubtedly causing the bears some pain.
But Tesla is still a long way away from being the most valuable car company in history. That title goes to Volkswagen – which in 2008 was not only the most valuable car company in the world – but briefly, the most valuable company in the world. The graph above shows the price of Volkswagen ordinary shares to late 2008 – where, through a combination of epic corporate intrigue, hedge fund strategies gone wrong, and the backdrop of the GFC, Volkswagen shorts were dealt one of the most epic setbacks in history. As VW stock liquidity plummeted and the share price shot up by 5 times in value, it culminated, for one day, in Volkswagens market capitalisation reaching $420Bn – larger than Exxon Mobil, Microsoft, Google, or Walmart.
The full story (it’s a fascinating read) is up on the Financial Times here.
Until next time,
The team at Multiply