Value investors are getting excited about emerging markets again after their terrible performance over the past few months.
The problem, as Arjun Divecha, chairman of Boston’s GMO, says, is that mostly what’s cheap is commodity-related stocks set to suffer from the slowdown of demand in China. Domestically-oriented companies are down, but aren’t that cheap.
There are a couple of really cheap areas, though. He points to Russian oil shares, and Chinese banks.
Both have horrible fundamentals. Russia is stuck between recession-hit Europe and slowing China, and has some of the worst corporate governance in the world.
Chinese banks are directly exposed to the slowdown in the country’s economy, are being told to lend less (hurting profitability), face higher funding costs (hurting profitability) and risk the bursting of the credit bubble (which would expose the bad debts from their relaxed lending decisions of the past four years).
Given all that, shares would need to be very very cheap to consider buying them. And they are. Charts showing just how cheap Chinese stocks have become follow after the break. Read more
Americans have been wondering if the housing market is in a double bubble for a little while, since Professor Robert Shiller, co-creator of the Case-Shiller house price indices, raised the danger.
The real action has been in housebuilders, though. Their valuations, based on price to estimated book value, peaked in May above where they stood at the height of the property bubble in 2005/6. Prices look very much like the rebound bubble in the Nasdaq, in the Dow Jones Industrials in the late 1930s and in the Nikkei 225 (although it wasn’t quite so big). This chart shows the Nasdaq and Nikkei time-shifted so the peaks overlap with the 2005 peak in housebuilding shares:
I’ve circled the point where the rebound went wrong again: seven to eight years later for both Nasdaq and, less spectacularly, the Nikkei (the Dow’s second depression-era boom-bust came in 1937, also eight years after the original bubble).
More fab charts, including one must-see on why US housing isn’t as affordable as everyone thinks, after the break. Read more
The fun part of the eurozone crisis, if there is one, is that you never know where to look. After the Cyprus crisis three months ago, the hunt was on for the next small peripheral country that would create a headache. Slovenia was a popular bet. So, among some hedge fund managers, was the Netherlands, where house prices are dropping alarmingly. There was a frisson of concern about Croatia’s accession to the EU. But it turns out that the next country to administer a shock, two years on from its bail-out, is Portugal.
You do not need to be an expert in Portuguese politics to see that the country is in a crisis, or that local markets were shocked by developments. When the foreign minister hands in a resignation hours after the finance minister has done the same thing, over an issue of core economic policy, and the existence of a fragile coalition is called into question, then it is natural that prices will be revised. Read more
One of the biggest arguments for emerging markets during their bull market, which started in 2003, was about “decoupling”. The idea was that the emerging markets had now managed to decouple from the developed world, and would be impervious to a recession there. It never worked as it was supposed to, with the arguable exception of a few hectic months at the end of 2008 when China’s stimulus appeared to end. Now, I’d argue, the decoupling has ended, but not in a good way.
I discussed emerging markets with Barclays’ Larry Kantor in a Note video. That included the following chart, which shows that emerging markets have now underperformed the developed world over the last five years, a period that starts roughly with the crisis over Fannie Mae and Freddie Mac in the hot summer of 2008:
Significant EM underperformance when developed markets were performing well is a new experience for many currently operating in the markets. More detail (and charts) after the break. Read more
Shocking news from Bloomberg for goldbugs (as if they weren’t hurting enough):
Gold dropped 23 percent this quarter, heading for its biggest loss since at least 1920 Read more
Just a brief post to pass on a thing of beauty. Critics of market-capitalisation weighting for indices always complain that you are in effect always buying the companies that are most overvalued. There is a lot of truth in this.
In the chart, Ned Davis Research create an index with just one stock in it: the biggest by market value at the time. As soon as a company is overtaken it is replaced in the index of one by the new leader. Trivia devotees may like to know that there have only been nine such stocks in the last four decades: Apple; AT&T (though not in its present incarnation); Altria (once known as Philip Morris); Cisco Systems (beneficiary or victim of the most absurd episode of equity overvaluation in history); ExxonMobil; General Electric; IBM; Microsoft; and Wal-Mart. All are undeniably great companies that at some point since 1972 the market thought to be worth more than any other. Here is how these companies performed compared to the S&P 500, starting in 1972: Read more
Okay, if you have a spare second after liquidating your portfolio, here’s a quick dive into ancient history (pre-taper, or the week up to last Wednesday).
It turns out all that selling in the build-up to last week’s Federal Reserve meeting was flooding not just back into the US, but mostly back into US equities. Here’s a lovely chart of mutual fund flows courtesy of Orrin Sharp-Pierson at BNP Paribas: Read more
Amid the post-Bernanke rubble, there are probably a few people sparing time from hedging their interest rate risk to look for bargains.
Look no further: the gold miners are cheap! I mean, really cheap. Gold has tumbled a long way from its peak, but miners have fallen much further – and are now trading at an extraordinarily low multiple of the gold price. This chart shows the ratio of the Market Vectors Junior Gold Miners index of small miners, and of the Arca Gold Bugs index of larger miners, to the gold price.
Larger miners are now the cheapest relative to gold they’ve been since the aftermath of the dotcom bubble, when they proved a serious bargain. The index of junior miners only started in 2004, but their prices are testing the low relative to gold reached after Lehman Brothers collapsed – after which they offered some of the best returns of any stocks anywhere. Read more
Is there really any way that financial engineering could cure cancer? That was the argument that MIT’s great Andrew Lo made during a visit to London last week, and being an entrepreneurial finance professor he is now trying to bang the drum to get his idea off the ground. If he has his way, he will end up creating a $30bn cancer “super-fund” that will invest in 150 different anti-cancer projects.
It is if nothing else a fascinating idea. I wrote a Monday column on it, while the Economist’s Buttonwood (in real life a former Long View writer) blogged on it. Both of us came out broadly in favour. My video interview with Professor Lo appears here:
Andrew Lo on Cancer
Virtually all of us as humans would like it to work. Does it actually stand a chance? More on that after the break. Read more
Today’s Note video is with the MIT economist Bob Merton – famous both for winning a Nobel memorial prize for his part in drawing up the Black-Scholes options-pricing theory, and for his part at Long-Term Capital Management, the hedge fund that nearly brought down the world credit markets when it came to grief just a year later in 1998.
Prof Merton was talking about a profoundly important subject. We know that the world’s credit markets were dangerously interconnected entering the crisis. He and a team at MIT are now working out how to measure that interconnectedness, in the hopes that by understanding the phenomenon we might be able to get to grips with it better this time. The alarming finding is that credit is even more interconnected now than it was before the crisis. The video appears here:
As we tried to cover a lot of ground in under five minutes, some extra detail on how Merton produced his findings might be useful – see after the break. Read more