We are not bullish on high-P/E ratio stocks. At this stage of the market, we expect more volatility, and we move away from companies which will not earn money during the period of rising interest rates that we expect for the next several years. Currently, having a large concentration of such stocks, is, to put it politely, uncomfortable and unwise. Exceptions might be stocks with proprietary franchises, and genuine and profound disruptive potential.
Beijing has finally begun to ease, this time via bond sales by local governments, encouraged by Premier Li Keqiang at a recent meeting of the State Council. Li pointed out “downward pressure” on the economy, and some analysts are calling for sub-5% growth next year. Moves are also afoot to boost liquidity in the building sector and loosen rules for land sales — another cash cow for localities. All in all, it looks like 2022 will see a moderation of China’s deleveraging stance.
The double whammy of omicron and Jerome Powell’s hawkish pivot (if it can fairly be described as such, given the currently still extremely easy state of monetary policy) conspired to bring November to a close flat or in the red for the major U.S. indexes. Still, the behavior of the market — with quick bounces off each sharp decline — suggests to us that the army of retail investors continues to exhibit a “buy the dip” mentality, and that greed, rather than fear, remains the predominant trader emotion.
As we look at the world, we see a number of geopolitical flash points that remain of concern, even if market participants’ attention is consumed by covid policy, interest rates, and inflation. Russia and Ukraine have massed troops in region of the Donbass and Crimea, and Russia is trying to exploit Europe’s energy instability to negotiate limits to NATO’s eastern expansion. Belarus is threatening gas supplies that transit its territory, and we have a hard time believing that such sabre-rattling would be happening without Moscow’s approval. We would not be surprised to see a Chinese move against Taiwan after the Beijing Winter Olympics, particularly if the U.S. is perceived to be weakened by domestic political turmoil. And the Iran nuclear deal show is ongoing, showcasing, we believe, the weakness of the west and the determination of Iran’s government to pursue regional hegemony against its Sunni arch-rivals by nuclear means. All in all, there are a number of global hot spots that could get interesting and distract attention from seasonal respiratory viruses.
While the market is not over, we do see reason to begin to plan for a more volatile future (especially for grossly overvalued sectors) — and to prepare strategies for dealing with inflation and rising rates. At current prices, a more appetizing dip in stocks likely awaits us. On that dip, we would be buyers of the tech-dominant themes we have long favored — but companies with real products, real profits, and real growth, and at a reasonable price. Some of the more outlandish and bubbly themes we now see — including the “metaverse” — will certainly have an investment future, but most of what’s currently on offer is hype. We’d prefer to buy after some disillusionment rather than near the height of euphoria.
In the same vein, we continue to like some precious metals, cryptocurrencies which are beginning to gain the characteristics of inflation hedges, and some real assets and particularly, tech-adjacent materials — though many of these are also currently selling at excessively rich valuations.
Opportunities will arise — from policy mistakes, fiscal intransigence, or geopolitical turmoil. Have a plan in place to hedge your tail risk and reap the benefits.
Thanks for listening; we welcome your calls and questions.
