Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
There’s been a lot of handwringing about the dominance of technology stocks in U.S. markets and Shopify Inc.‘s outsized influence on the TSX in 2020. Some, like Citi strategist Tobias Levkovich, are likening the current lack of market breadth with the late 1990s tech bubble. Credit Suisse’s Jonathan Golub, however, is having none of it,
“There’s lots to worry about these days including an increase in COVID-19 cases, a strained relationship with the world’s #2 economy, ballooning deficits and the potential for higher taxes. Fortunately, you can cross market concentration off your list of things to fret about. Today’s top 5 companies (AAPL, MSFT, AMZN, GOOGL, FB) represent 22% of S&P 500 market cap, versus 18% in March 2000 (MSFT, CSCO, GE, INTC, XOM). The current top 5 capture a greater percentage of the market’s earnings. They’re also delivering faster relative growth, and trade at a much lower multiple.'
“@SBarlow_ROB CS’s Golub: ‘Fortunately, you can cross market concentration off your list of things to fret about.” – (research excerpt, charts) Twitter
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Financial repression refers to a central bank policy of keeping bond yields artificially low in order to support asset prices and economic growth. The side effects of this are low returns on bonds which severely crimps the rewards for savers,
“So far in this crisis, market participants have focused on the flurry of actions from central banks, but have mostly failed to notice the central bankers’ increasing impotence. The silent revolution in the creation of money means there are very limited prospects of inflation expectations remaining anchored… While previous rounds of reflation have almost always been positive for stock prices, at least at the start, this reflation is likely, in due course, to force an aggressive form of financial repression… Efforts to inflate away debts require that market-determined rates of interest are abolished. Yield curve control — or capping borrowing costs — is a necessity and will be achieved through forcing savings institutions such as life insurers and mutual funds to buy government debt at yields below the rate of inflation.”
“A new age of financial repression may soon be upon us” – Financial Times (paywall)
See also: “Rosenberg: Wake up investors, you’re not getting the yield you deserve in the riskier domains of the bond market” – Globe Investor
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Citi global economist Catherine Mann is concerned about “a capex collapse with the [central bank] liquidity spigot full on”,
“Projections show a business investment collapse in 2020 with momentum only in the second half of 2021. Strong headwinds face business investment. Continued high uncertainty. Contracting trade supply-chain intensive capital goods. A further delay in expected return to pre-COVID-19 level of GDP. Net jobs projected to be lost in the advanced economies. Only investment in technology is bright…
Central Banks of all stripes are pushing liquidity into the marketplace. Credit growth has taken off. There is a torrid pace of corporate issuance. Although, not all liquidity indicators are supportive. Tighter lending standards, lagged effects of the financial condition pinch, and potential ratings downgrades all are counterweights to the growth objective of the liquidity spigot... Return to pre-COVID-19 GDP is far in the future. The decision to invest in new plant, equipment, technology, etc, is a function not only of the local demand climate, but also the state of the global economy. "
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Newsletter: “One of these overweight sectors – commodities – is not like the others.” – Globe Investor
Diversion: “20 Things You Somehow Missed In The Matrix” – WhatCulture (video)
Tweet of the Day: “@jsblokland #Stocks have not been this attractive compared to US #Treasuries since the 1940s! – Twitter
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Scott Barlow