Everything I see says we’re in a stock picker’s market.
Today’s Profit Watch does a world tour to show you why relying on the general indices to generate a decent return from here looks tricky.
There’s a term in chess called ‘zugzwang’. It’s not a position you ever want to be in.
It means your next move is going to leave you in a worse position no matter what you do.
I’m beginning to feel that way about the US presidential election next year…
One way means another four years of the trade chaos around Trump.
A second could be Elizabeth Warren and her policy to break up the large US tech companies.
This is not something to take lightly. Facebook CEO Mark Zuckerberg isn’t.
The Financial Times reports1 on some leaked footage from a Facebook meeting where he says Warren’s plan poses an ‘existential’ threat to his business.
You may not own Facebook stock or even care if it disappears off the face of the Earth.
But it’s the technology stocks that have driven the US bull market since 2009.
Anything that drags them down will likely drag the wider market down.
It’s not as if Warren’s plan stops with Facebook. Amazon, Google and Microsoft would be in the crosshairs as well.
The market will be assessing the odds of a Warren win from here on in. The higher those go, the more regulatory risk the tech stocks carry.
This is an important theme to watch when manufacturing signals keep contracting around the world.
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The markets can weather this better because it’s not as big a factor in the Western economies as decades ago.
But if you take away the growth in big tech, then the burden falls heavier on niche themes (for now) like space and genetic editing to hunt for big alpha.
These are unlikely — yet — to lift the indexes like the S&P500 that most passive funds are benchmarked against.
It’s not as if anyone is going to be buying growth stories out anywhere but the US, either.
Stress and problems in Asia
The mess in Hong Kong isn’t going away by the look of things.
The Economist says this morning that police shot an 18 year old protestor.
Petrol bombs and bricks are going the other way. It’s been four months of chaos over there.
Then we have the signals of distress still coming out of India.
I already flagged the demise of India’s tallest building project and the suicide of a major businessmen over there.
Now we have Indian depositors getting nervous about getting their money back.
The Reserve Bank of India has come out2 and assured the country’s savers that the banking system is ‘safe and stable’.
That would make me even more nervous. Officials always say things like that when markets show signs of stress.
If things were safe and stable…there wouldn’t be need for the reassurance!
It looks to me like the Indian real estate and credit markets are a total mess.
India is not a big player in the global market. But it was supposed to be a source of growth for the US tech firms like Amazon.
And for us here in Australia?
Banks and miners: going nowhere?
We know bank earnings and dividends are under pressure as the cash rate sinks toward zero.
That leaves one big source of strength for the ASX: the price of iron ore.
This is still trading around US$90 a tonne — way beyond expectations at the beginning of the year.
But the Australian Financial Review reports that Credit Suisse is downgrading the big miners. Credit Suisse forecast a sinking iron ore price over the next few years.
In general, I pay no attention to forecasts like this, except to the extent that other people might pay attention to them.
But you can’t help but wonder how much the market will be prepared to pay up for these stocks as the trade war grinds on.
A colleague of mine is travelling around China as I write this.
He says construction is booming in every city he’s passed through.
The catch is China appears to be building endless apartment towers with no one in them.
That’s a familiar story. But it does make you wonder how long it can last for.
Here’s another reason why. Many Chinese property developers and banks have US dollar liabilities.
There are signs that there’s a shortage of US dollars developing around the world. This stress might show up in China at some point.
It’s something to watch for. The main point is it’s hard to see the ASX/200 really breaking out anytime soon.
That doesn’t mean individual stocks can’t go for a run. We’ve come full circle on our trip around the world.
We’re in a stock picker’s market.