Wednesday, August 25, 2021

This Week's Message: Why European Equities -- And -- Highlights From a Week's Worth of Messaging

In last week's macro video I featured a clip of an interview where an analyst made a case for European stocks that comports with our own long-term thesis. I also reiterated that much of the rest of the outside world's equity markets offer a unique relative (to the U.S.) value proposition as well.

Here, one more time, is us charting the S&P 500 from the 2009 bottom to current (white), along with equity indices for Asia-Pac (blue), the Eurozone (green), emerging markets (purple), as well as gold (orange) and ag commodity futures (light blue):

Here are 5 key points with regard to Europe from the video clip:

1. Europe has been essentially underwater for a more than a decade. I.e., there's huge relative performance catch up to be had.

2. The $750 billion covid recovery fund is just now beginning to get allocated. I.e., "That covid wow factor that other regions have enjoyed significantly is really just getting started in Europe."

3. Totally neglected. "People tend to repeat what they see." "European equities have not made investors money over the last 10 years. In fact it's been appalling." "So you start out with lower allocation levels." "So putting more money into Europe is less difficult than other regions; you've got more of that incremental effect." 

4. They're finally entering something closer to a fiscal union.

5. An aggressively accommodative central bank that is clearly at an earlier stage in the easing process than the U.S... Although I'd argue that the U.S. central bank is light years away from any meaningful tightening.

We also sympathize with her thinking on where present excesses lie:

When asked what space in the global equity setup is the most overrated/overvalued, her answer (which speaks to the handing off of the baton we anticipate over the years to come): "Large cap [US] growth is completely over weighted."  "Any pattern that's been on for the past 10-years is going to be, by definition, too consensual. Which means there's, by definition, froth in there." "Companies trading at 20 times, 30 times revenues is not normal."

And here are a few key highlights from our messaging over the past week:

From  this morning:

The following quote for Leon Levy's indispensable book The Mind of Wall Street has me thinking about the notably different allocation mix of our core portfolio versus its makeup from the market low in 2009 through the end of 2019. Having lived intimately with markets since the summer of 1984, and having studied their dynamics throughout history -- while of course ultimate outcomes remain to be seen -- suffice to say that my observation is that conditions today are vastly different than the conditions that had us all in equities during that longest bull market on record.

"Those most adept at profiting from a particular market are often least likely to notice when the game is over, and probably the least psychologically prepared to profit from the successor market."

From yesterday:

We'll devote this morning's message to yesterday's release of IHS Markit's August U.S. Flash (preliminary) Manufacturing and Services Purchasing Managers Indices (PMI). They say a ton about current conditions.

Highlights:   emphasis mine...
"Private sector companies across the U.S. signaled a further strong upturn in business activity during August, however, the pace of growth slowed to an eight-month low. Capacity pressures, material shortages and the spread of the Delta variant reportedly weighed on the output expansion."

"Material shortages, difficulties hiring new staff and the spread of the Delta variant were all highlighted as factors driving a steep accumulation of backlogs of work during August. The strong rise in outstanding business was only slightly below July’s record high, and coincided with only a marginal upturn in employment. Staffing numbers rose at the slowest rate since July 2020, often linked to difficulties finding staff.

Despite concerns regarding the spread of the virus and the longevity of supply chain disruptions, U.S. companies remained upbeat regarding the outlook for output over the coming year. The degree of confidence ticked up from that seen in July."
Those three paragraphs pretty much capture the gist of the reports.

From  this Monday

...are markets buoyant this morning on the prospects for vaccine uptake (Thursday, Friday and Saturday each saw 1+ million doses in the US, Sunday nearly a million), or are they simply assuming that delta will stay the Fed's hand for now, with J. Powell delivering that message at this week's now-virtual Jackson Hole meeting?

If it's the latter, and Asian lockdowns and Western vaccines indeed turn the tide on delta, we'll look for last-week-like angst hitting markets come the lead-in to the Fed's September policy meeting.

From last Friday

I'm thinking about those first-time homebuyers being priced out of the current market. Yes, it's sad! But then again, they're essentially not able to buy at what may very well turn out to be a long-term market top. 

My point? At least in real estate there are at times constraints that prevent a person from making what could turn out to be a not-happy long-term decision. Not the case, alas, when it comes to the unsuspecting investor loading the boat with sky-high-priced U.S. tech stocks. No constraints there...

And from last Thursday:

Howard Marx's Mastering the Market Cycle: Getting the Odds on Your Side is a must read for any serious investor, or advisor. The disregarding of cycles he refers to in the following quote can only happen when the price action deviates from underlying cyclical reality, which has the unsuspecting investor forever chasing what's hot. 

Understanding cycles and price trends, therefore, has the diligent investor/advisor allocating accordingly, then waiting patiently as things logically unfold. Again, as I've come to learn (in head-pounding fashion over the decades), patience is key!
"Invariably, investors who disregard where they stand in cycles are bound to suffer serious consequences."

Thanks for reading!

No comments:

Post a Comment