Picking resilience - market highs call for thoughtful stock selection

25 October 2019

The Noise

  • The US central bank continues to expand its “not QE” program, to the tune of at least $120bn of liquidity being injected into the repo market (the system by which financial institutions lend to each other overnight) in response to continued pressure in the system. Markets lapped up the extra liquidity boost, which helped drive the S&P once again to all-time highs. 

  • Earnings season is just starting to get going, with companies across the world reporting on their Q3 results. It’s been a mixed picture so far even within sectors, suggesting that it is corporate strength rather than broad themes that are really impacting results. For example cloud computing titans Amazon and Microsoft posted very different sets of results; making it important for investors to work out the underlying differences in implementation of their strategies. 

  • Investors in Softbank’s Vision Fund might have been left wondering whether the Japanese investment company should have gone to Specsavers this week, after it suffered a $5bn write down following the failed sale of embattled real estate company WeWork. The Vision Fund is well known for taking large positions in high stakes start-ups with unproven business models, but that have disruptive potential.

The Numbers



The Nuance

Despite the widespread geopolitical and economic risks, equity markets have continued to nudge towards near highs over recent months. In the midst of earnings season investors now have to pick through company earnings reports to find signs of resilience and profitability in individual companies. This work is vital now, because we are simply not experiencing the same kind of widespread, thematically-driven equity market gains that we have seen over the last decade.

Nor do we see any evidence that this is about to change any time soon. Equity indices overall have stayed elevated – albeit without much growth – for the past two years. US markets still lead the pack, but even there, overall returns have been muted.

And while this might all sound negative, the good news is that this is a stockpicker’s market; indeed active investors can easily be frustrated by broad based market gains which equally reward average and brilliant companies. Now, there is more of a chance for the resilience and strength of individual companies to be the driving force behind market returns. 

Quote of the week

“For years, no one believed him. The police, doctors, nurses and even his family told him he wasn’t telling the truth, that he must be a closet drinker.” Chief medical resident, University of Alabama
This week the plight of a 46 year old man repeatedly pulled over for driving under the influence – despite not drinking – has finally been revealed. His unusual predicament came to light when he was hospitalised for drink driving, insisted that he had not had a drop, and was still found to have the blood alcohol level of someone who had consumed ten drinks. The culprit? Carbs. It turns out that he suffers from “auto-brewery syndrome”, a rare condition whereby carbohydrates get fermented by an overgrowth of brewer’s yeast in the gut, and cause sufferers to become extremely drunk without consuming any alcohol. He is said to be recovering well thanks to a course of anti-fungal therapy, although this was momentarily derailed when he was found to be secretly eating pizza throughout the treatment.
Source: newscientist.com

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