Monday, 27 April 2015

Stocks hit records despite absence of funds inflows

Stocks have been having a good run again recently.

The Standard & Poor's 500 rose 1.8 percent last week to close at a new high. The Nasdaq Composite jumped 3.3 percent to wipe out its losses since the dot-com bubble and hit a record high.

Riskier stocks have also done well. Small stocks have significantly outperformed the S&P 500, as have emerging market stocks.

However, strategists at Bank of America Merrill Lynch sounded a note of caution last week.

They said in a note on Thursday that even as US stock markets have been making record highs, investors have been pulling money out of US stock funds.

“Correction risks will grow in [the] absence of fresh inflows in coming weeks,” wrote the strategists.

Thursday, 23 April 2015

Bonds overvalued but remain in demand

CNBC reported that bonds are not well-liked by fund managers.

A survey by Bank of America-Merrill Lynch found that a net 54 percent of fund managers remain underweight in bonds in April. A net 84 percent said bonds are overvalued, the highest in the survey's history.

And yet, demand for bonds is expected to remain firm. JPMorgan has estimated that demand is likely to outstrip supply globally by around $450 billion this year on a notional basis, widening from $384 billion last year, with retail investors expected to be major contributors.

Richard Jerram, chief economist at Bank of Singapore, said that "there is still globally a search for yield taking place".

In addition, JPMorgan noted that equities have rallied even more than bonds in recent years, leaving retail investors "more overweight equities vs. bonds even as they bought more bond than equity funds over the same period".

Wednesday, 22 April 2015

Should governments borrow more?

Brad DeLong of the University of California at Berkeley suggested at the International Monetary Fund’s “Rethinking Macro” conference last week that rich countries should borrow more.

From the WSJ blog:

The interest rate that rich countries with super-safe debt ... pay is astonishingly low... In the U.S., the Treasury yield has gone from roughly equal to growth in nominal GDP in 2005 to 3 percentage points lower today.

By Mr. DeLong’s reckoning, this means those countries are borrowing too little... Mr. DeLong asks, “Isn’t the point of the market economy to make things that are valuable?” Since the debt of rich countries is “very cheap to make… shouldn’t we be making more of it?”

However, DeLong's suggestion could be problematic if future GDP growth turns out lower than currently projected.

Paulo Mauro, formerly of the IMF and now at the Peterson Institute for International Economics, raised this issue in a blog post.

For example, a country projecting a stable government debt ratio of 100 percent of GDP over the next decade or two would experience an increase in that ratio to 140 percent in 10 years if growth turns out to be 1 percentage point lower than assumed. As deficits rise, the ratio would balloon to more than 200 percent after 20 years.

In this regard, it is probably useful to remember that apart from the US, many of the economies with very low interest rates, for examples Japan and Germany, are rapidly ageing societies, and thus have little capacity for rapid economic growth. Japan in particular has already spent much of the past few decades in virtual stagnation.

Tuesday, 21 April 2015

Yen resilience unlikely to last

Sober Look noted that despite the large quantitative easing being implemented by the Bank of Japan, the yen has remained steady against the US dollar so far in 2015 and has even risen against a trade-weighted yen index.

Part of the reason for this is that recent US economic data have been weaker than expected.

Indeed, Bloomberg noted that its economic surprise index for the US has fallen to the lowest level since the financial crisis.

Nevertheless, Sober Look thinks that the yen is unlikely to maintain its resilience for long.

In the long run however, further yen weakness seems inevitable. The reason has to do with the sheer relative size of Japan's quantitative easing... Furthermore, given the scope and size of this program, it is unclear if the Bank of Japan can ever effectively exit it without a massive disruption to the nation's economy...

Monday, 20 April 2015

Many tech stocks look like value stocks

Bloomberg reports today that the rally in technology stocks this year has extended the Nasdaq 100's gains since 2009 to 317 percent and brought it within 8 percent of its record high set in 2000.

In addition, it has pushed the price-earnings multiple for the Nasdaq 100 to 22.9, above the average valuation of 19.2 over the last five years but below the mean level of 23.5 since the start of 2005. The index is also trading at 2.9 times annual sales compared with 2.5 over the last decade.

Among the well-known tech stocks, Microsoft is trading at a multiple of 15.8 times earnings, near the average since 2005, but Facebook and Regeneron Pharmaceuticals Inc. are trading above 70. Still, Facebook is much cheaper than it has been over the last three years, when the price-earnings ratio averaged more than 300.

Google Inc. trades at 26.3 time earnings, close to the Nasdaq 100 multiple but down from a 10-year average of 34.8.

Indeed, Bloomberg notes that when compared to the height of the tech bubble in 2000, tech stocks are now much cheaper.

Declines in the biggest U.S. tech stocks and expansion in their profits have done much to close the valuation gap from 2000. How overvalued where they then? Based on prices at the Nasdaq peak and analyst forecasts for 2015, Microsoft was trading at a 15-year forward price-earnings ratio of 72, Cisco Systems Inc. at 41, Intel at 49 and Oracle Corp. at 45.

“I wouldn’t call technology stock valuations stretched,” Jason Benowitz, a New York-based senior portfolio manager who helps oversee $4.5 billion at Roosevelt Investment Group Inc., said by phone. “Many tech companies are considered value stocks.”

Thursday, 16 April 2015

Chinese economy slows

China’s economy is slowing.

Data on Wednesday showed that China’s real gross domestic product rose 7 percent in the first quarter from a year earlier, the weakest pace since the last quarter of 2009.

The slowdown extended right into the end of the quarter. Industrial production rose 5.6 percent in March from a year earlier, the smallest increase since November 2008.

My previous post notwithstanding, the latest data adds to concerns that China's stock market is getting overextended.

Just as well then that it has just become easier for investors to bet against Chinese stocks.

Futures on the small-cap CSI 500 Index started trading on Thursday. This comes five years after China introduced futures on the large-cap CSI 300 Index.

Chinese stocks rebounded on Thursday. The Shanghai Composite Index jumped 2.7 percent to a seven-year high after having fallen 1.2 percent on Wednesday.