In the US, it’s Labor Day. In Hong Kong, it’s protest day — and it has been for a long time now.
The New York Times reports that local students aren’t going back to school as expected with summer now over.
Instead, they’re wearing gas masks and forming human chains.
This political crisis shows no sign of slowing.
You can say it’s getting worse, or more interesting, depending on the way you look at.
People in Hong Kong are now calling on the UK to give them full British citizenship rights.
They want this as an avenue to escape from the territory.
Does the UK dare anger China over this? Don’t forget we are one month away from the Brexit deadline.
UK Prime Minister Boris Johnson has said this is non-negotiable. Meaning, he has his hands full already.
If Hong Kong is going to start exporting people, we can expect plenty of money to flow out as well.
How much ends up in Australian property, gold, bitcoin and elsewhere remains to be seen.
Hong Kong to lose to Tokyo?
We already know one effect of the protests. It appears Hong Kong is losing in the race to secure the Saudi Aramco IPO I mentioned last week.
I tabled three options for this: New York, London or Hong Kong. Silly me! We got a wildcard I didn’t expect: Tokyo.
The word went around last week that Japan is the new frontrunner. My hand hit my forehead straightaway. It was foolish not to consider this option.
We kind of forget just how big the Japanese economy and asset markets remain because they’ve stagnated so long.
The Tokyo Stock Exchange is the biggest outside of America.
The Wall Street Journal reports that Japan comes with a bonus alongside great food, exotic toilets and clean streets: Fewer disclosure requirements.
Implied in this is that Saudi Aramco could keep its cards closer to its chest than in America when it comes to manipulating the oil market for its own benefit.
It also raises the perennial question over just how much oil Saudi Arabia has in reserve and whether it’s as much as the Saudis claim.
Don’t expect to find out anytime soon; the valuation of Saudi Aramco is implicitly tied to this. Saudi Arabia’s not about to potentially sacrifice billions of dollars playing a straight bat with investors.
Saudi Aramco is the most profitable company in the world. But what multiple can investment banks put on this business?
Here’s the problem. Oil, while still vital, is perceived to be a dying industry.
Oil shares are on an ever-sliding share of market capitalisation.
It’s possible this month that the market cap of one stock — Microsoft — will soon exceed that of the seven largest multinational oil companies combined.
In 1980, the investment community would have been astonished at such an idea.
It may not mean much to you and me specifically. But more broadly, this is not an abstract question. It’s vital to you as an investor.
The secret of ‘100-baggers’
Two things happen around the biggest stock market winners.
Firstly, they grow earnings.
Secondly, the multiple which investors will pay for those profits goes way up.
My former colleague, Chris Mayer, shows this in his book 100 Baggers.
Look no further than the current leading stocks in Australia to see this in action. WiseTech, for example, trades on an earnings multiple of 137.
The perennial hunt in the market is to find businesses that can deliver these two things.
It’s not enough for a business to make money. There are some smaller resource stocks right now, for example, that bring cash in the bank every quarter.
But the ‘narrative’ around mining — outside of gold — is just not strong enough for investors to pay up for these stocks in a big way. That’s unless they bring an exploration catalyst with them.
This is where the danger in ‘value traps’ can lie. It’s also why value investing has fallen out of favour in recent years.
The big winners have been in tech — and they’re not even always profitable companies. But the narrative is there to send the stocks up from the potential growth.
That’s not to say this dynamic can’t change. In fact, it likely will during the next bear market.
The leading stocks usually fall the heaviest in a big decline because they have such a rosy future baked into them. There’s no margin for error.
It seems to me, right now, that there’s no clear narrative about what’s driving the markets.
Trade war and recession fears linger, but company results aren’t that bad either. It feels like a range-bound, trendless flat spot.
The solution? Company-specific catalysts will get your shares moving. In other words, we’re in a stock picker’s market.
PS: Keep reading below for some thoughts on gold from my colleague, Jonathan Evans…