I had an interesting few days up at the Gold Coast where I spoke at the Australian Investors Association’s annual conference. It was a really enjoyable few days, and I got to meet many of our members and investors at the conference. One thematic that seemed to be recurring with many of the people attending the conference was just how ubiquitous and widespread the general concern was about the market’s current level of valuation, the perception of complacency, and the potential for a sharp fall in prices.
A few weeks ago in my daily note I wrote about the “the bull market we love to hate” which referenced the general theme that the current bull market in stocks lacks conviction with many cashed up on the sidelines, and generally positioned for a severe downturn. I argued that one of the reasons passive investing is so in vogue at the moment is because most ‘active’ fund managers have been not just cautious on internet and technology stocks, but cautiously positioned for some time.
From Carl Icahn, Lloyd George to George Soros, we have listened for some time to many who have warned about the market. And these arguments are valid, but the problem is the market is increasingly positioned the “same way around”. And as I addressed at the AIA conference, herein lays the seed to the latest bull market and why it continues to grind higher.
It is a fact that bull markets climb a “wall of worry” and we certainly have this omnipresent at the moment. And that I think is just as big a concern. Sir John Templeton, a market veteran of last century, said that “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
I would argue that the bull market, despite being 8 years old, is positioned somewhere between “growing on skepticism and maturing on optimism”. If the market was at the “dying on euphoria stage”, not only would the mood at the AIA conference been less sanguine, but we would find active fund managers themselves throwing caution to the wind.
I made this point when speaking at the conference on Tuesday and just don’t see much euphoria around the markets, especially in some of the countries and regions we are focused on such as Japan and Europe – which could not be more oppositely positioned at the other end of the spectrum. I have no doubt that at some stage this year the market will be “tested” on the downside, but whether stock markets sustain these downward movements remains to be seen.
Bull markets by their inherent and intrinsic nature carry as “few passengers” as possible and we are seeing this dynamic play out in text book fashion. As a contrarian investor, I always try to pay attention to the underlying risks in the market, but I also have to look at what the “herd is doing” and counter intuitively size that up. This bull market in my opinion, still has legs, and further yet to run, and lacks many of the typical red flashing lights.
In Asia the Nikkei closed 0.47% higher at 20,080 with Honda rallying after the release of strong quarterly results. Japan has enjoyed very good earnings reports for the quarter which has helped the stock market defy a much stronger yen. In Australia the ASX 200 closed 0.49% lower at 5,744 and in China the CSI 300 was off 0.25% at 3,760.
Asian technology stocks linked to Apple rallied with Taiwan Semiconductor up 1.89% and Hon Hai Precision Industry up 1.72%. The Korean technology groups LG Innotek, LG Display and SK Hynix also rallied. Stocks we hold which manufacture components for Apple such as Murata Manufacturing in Japan, lifted 5% yesterday.
In the Eurozone the Stoxx 50 closed 0.52% lower at 3,459 as the euro continued to strengthen against the US dollar. The banking sector was weaker as Société Générale reported a 28% decline in second-quarter profits. The prospects of the Eurozone breaking up look to be increasingly remote with popular support hitting a 13-year high. This is a far cry from just 7 months ago at the beginning of the year. The Eurobarometer found that 73% of Eurozone citizens support single currency membership.
Spanish unemployment has seen its sixth consecutive monthly drop with the unemployment rate now standing at 17.1%. The number of Spaniards out of work at 3.3 million is down by 347,000 over the last 12 months. This is really encouraging and pleasing to see for a nation that endured “depression” like unemployment and hardship post GFC.
The green shoots coming through in Spain are going to have a galvanizing impact on the economy and provide much needed confidence to the population. We remain well represented in Spanish stocks in the Fat Prophets Global Contrarian Fund, holding names such as Bolsas Y Mercados, Bankia and Telepizza.