This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Jan. 7: We are seeing some wild numbers for Nasdaq share volume lately, much bigger than anything in recent years. This points to a speculative blowoff underway.
For many years, analysts have looked at the ratio of Nasdaq to NYSE volume as an indicator of tops and bottoms for stock prices. [Based on] a 10-day simple moving average of that daily ratio, the current reading is the highest since 2001, when the stock market was in the process of violently unwinding the 2000 internet bubble peak. Lesser peaks in this 10-day moving average have been associated with meaningful price tops. This reading is in a whole separate category.
Part of what is happening is an upsurge in the trading of stocks that have a low share price…so to trade any meaningful dollar amount in these stocks means trading more share volume, due to those low prices.
A lot of investors, especially new investors, hold the funny belief that a low numerical share price means that a stock is “cheap.” That used to be true, back in the 1800s and early 1900s when companies issued stock at a par value of $100. That custom was also part of why the NYSE would delist a stock if its share price fell below $5, because that meant it had fallen so far from its par value that it was not considered a reasonable investment.
But today companies can pick their own initial public offering prices at fanciful numerical values. So the message of a low-priced stock being cheap is no longer valid. But that doesn’t stop the Robinhood crowd from playing around in that segment of the market.
And this is a big part of why the Nasdaq/NYSE volume ratio works as an indicator of froth or fear. The extent to which traders and investors decide it is a good idea to speculate on low-priced stocks, and to jack up their trading volume, can be an indication of frothy bullish sentiment.
Hong Kong Property: 50% Below Book
Guild Investment Management
Jan. 7:Hong Kong had a rough 2020, hit by the pandemic, escalating tensions between the U.S. and the People’s Republic of China, and ongoing resistance in Hong Kong to the effective end of the “one country, two systems” policy that had once seen the PRC largely leave Hong Kong’s local governance intact. With the new security law imposed by the mainland government, those days are over—a few decades earlier than hoped.
Hong Kong’s economy is largely driven by finance, property, and tourism. All were severely affected by 2020’s perfect storm. In addition, the government did not engage in the same massive life-support efforts extended to the tourist industry and local employers by most of the world’s developed governments. Put it all together, and Hong Kong-listed property developers were trading at a 50% discount to book at the end of the year.
We believe that this severe a dislocation is unjustified. First, the mainland needs Hong Kong to continue to exist and function as a finance-focused gateway to the rest of the world. They do not want to lose it; they are now fully in charge, and it is in their interest for Hong Kong to prosper economically and financially. The Greater Bay Area of which Hong Kong is a part accounted for 11% of China’s economic activity and 36% of its exports in 2019.
Second, Hong Kong property has remained robust, and is now 1.1% above its March low. It has remained steady after a decade and a half of rapid appreciation—in spite of the political turmoil of the past few years. Construction is low, which supports higher prices. The falling U.S. dollar, to which the Hong Kong dollar is tied, has meant that Hong Kong financial authorities have been injecting liquidity, and rates have dropped dramatically.
—Rudolph von Abele
How to Play a Coming Capex Revival
Jan. 7: An important driver of the recovery this year will be capex [capital expenditure]. So far companies have not expanded their capital stock aggressively, worried by the uncertainty caused by the pandemic. However, the vaccines rollout is changing this equation. Vaccines allow for a normalization of economic activity and spending patterns in 2021. They allow for a recovery of permanent income for a large swath of the population and thus, are consistent with a durable rebound in consumer sentiment and spending. The higher likelihood of greater fiscal spending only strengthens these dynamics.
Companies are entering this period of stronger consumer spending saddled with bottlenecks, as illustrated by the sharp increase in the ISM’s Supplier Deliveries and Prices Paid components. Thus, businesses are now more likely to take advantage of record-low interest rates and rebounding profits to expand their capital stocks. Already, the bounce in core-capital-goods new orders highlights the upside potential for U.S. capex. The higher chances of an infrastructure-spending bill following the Senate takeover by the Democrats would only feed overall investment and boost economic activity further this year or next.
In this context, it continues to make sense for investors to positions themselves in industrial equities and financials, which will be prime beneficiaries of higher capex. Moreover, small caps have a large overweight in these two sectors. Thus, while the Russell 2000 needs to work out overbought conditions, it remains an attractive cyclical play.
—Mathieu Savary and Team
The Case for Non-U.S. Markets
Into the Unknown
Peak Capital Management
Jan. 4: Over the past three, five, and seven years, the S&P 500 index has outperformed the MSCI EAFE index on a cumulative basis by 47%, 59%, and 70%, respectively. The price/earnings ratio on the MSCI EAFE index is 18, compared to a P/E ratio of 29 for the S&P 500. From a pure valuation standpoint, investors could begin to look for opportunities overseas. In other words, the equity risk premium, or ERP, on international markets could begin to look more attractive compared to domestic equity markets. (The ERP describes the excess return an investor can potentially earn from investing in equities over a risk-free investment, such as short-term Treasuries or a money-market fund.)
It is a similar situation for emerging markets. Over the past three, five, and seven years, the S&P 500 has outperformed the MSCI Emerging Markets Index on a cumulative basis by 27%, 57%, and 170%, respectively. The P/E ratio on the MSCI Emerging Markets index is approximately 17. Emerging markets could provide a compelling ERP over the next five to 10 years, given changing demographics and population trends.