Another 3 Investment Themes To Consider

by: Paulo Santos

This is the second article on a long series of articles covering and summarizing different investment themes/thesis. These themes are usually very powerful and answer for the movement of stocks, entire sectors or even the entire market.

The previous article on this series can be found here:

3 Investment Themes To Consider

Themes 4-6

This article will be the second on a series of articles summarizing themes which are moving specific sectors or markets today. Knowing these themes can help when selecting securities. I'll continue with the following 3 themes:

  • Reach for yield;
  • US Baby boomers and aging;
  • The mobile revolution.

Reach for yield


"Reaching for yield" is the new market sport. Between investors (pension funds, insurance companies) whose mandate requires yield which can no longer be found in Fed-inflated bonds, and investors who plunge into margin debt to finance yielding portfolios looking for a free lunch, it almost looks as if the entire market is reaching out for yield.

Entire sectors, like the mREITs (NYSEARCA:MORT), are built on taking advantage of zero interest rates in the short end, to leverage and buy yielding assets. And the rush to buy any company with dividends is also entirely visible and is producing bubble-like behaviors like the ones exhibited by the Johnson & Johnson (NYSE:JNJ) chart at the start of the year.

Reaching for yield, and leveraging it using zero interest rates (or close), is a natural consequence of a world where central banks are printing and expected to stay printing or at the very least expected to keep those interest rates at zero percent. Due to low economic growth in developed countries, huge fiscal deficits and impossible to pay promises in social security, welfare and healthcare, it's likely that the printing and zero interest rates will continue for the foreseeable future. This in turn implies that until we get inflation the reach for yield is bound to continue.

Positive implications

Anything with a decent yield is likely to be favored by the markets. As long as printing continues, any dips in yielding assets are likely to be temporary because the printing works through the flow. For instance, in the U.S., $85 billion is printed per month and the Fed buys assets with it (MBS and treasury bonds). These assets have to be substituted by the sellers, meaning buying in direct and indirect, most likely yielding, substitutes.

Negative implications

Bubbles are starting to appear since some of the public reaching for yield is not that informed. Funds like PIMCO Global Stocksplus & Income Fund (NYSE:PGP) are pumped way above their NAVs (52% in PGP's case) due to the public not seeing the difference between return on capital and return of capital.

A bubble is also likely in high yielding bonds, for which iShares iBoxx $ High Yield Corporate Bd (NYSEARCA:HYG) and SPDR Barclays High Yield Bond (NYSEARCA:JNK) are proxies.

It's also likely that many yielding assets, while not being bubbles, are overvalued. This means downside risk is not being properly compensated. This risk can easily materialize if, even temporarily, central banks taper off and end their printing campaigns.

US Baby boomers and aging


Most of the Western nations are seeing significant aging of their populations. This is especially pronounced in Japan. Due to the "one child" policy, it's also a significant factor in China. This is happening both because of an expansion of life expectancy and a drop in fertility. Along with this ongoing phenomenon, there's also the effect of the baby boom generation whose births took place right after WWII and are now reaching retirement age.

Pyramids in many developed countries show this phenomenon. The U.S. is still better than most as it still has population growth, but it too faces the retirement of the baby boomers as shown below.

Positive implications

Many industries are likely to see increased demand from a much larger cohort of retirees. Retirement homes, healthcare and patient care are likely to be favored. The iShares Dow Jones US Healthcare (NYSEARCA:IYH) is a proxy for healthcare.

Negative implications

The retirement of baby boomers can have an overall negative implication for stock markets, due to the lower propensity to accumulate equity by retirees, which instead have to live on what they've accumulated earlier. This in one hand explains part of the "reach for yield" as some retirees try to live on the yield of their portfolios, but on the other also means that most likely part of the portfolio has to be regularly sold.

My article "Stocks, Bonds And Demographics" explains in greater detail, using academic studies, what the impacts are expected to be in the next decade - both for stocks and bonds.

The mobile revolution


Mobile voice is quickly replacing fixed voice as the main means of telecommunication. It isn't hard to understand why. A mobile phone is like an extension of a person, allowing it to communicate at great distances in much the same way as it communicates face to face. The fixed telephone allowed for the same but required both caller and receiver to be at a fixed and known location at the same time - it was thus much inferior to the mobile phone. It's thus not a surprise that mobile phones are quickly overwhelming fixed phones, especially in countries where the phone infrastructure was less well developed.

Mobile data, for its convenience and the emergence of powerful mobile computers such as smartphones or tablets, is also seeing massively increased usage. Ubiquitous access to information is a result.

Positive implications

The implications are tremendous, the emergence of tens of different new market segments is ongoing and hard to predict. Mobile carriers such as Verizon (NYSE:VZ), Vodafone (NASDAQ:VOD) or China Mobile (NYSE:CHL) were greatly favored over the fixed-line carriers in the same countries.

Businesses based on mobile data are also likely to crop up, and some will be major winners. Machine-to-machine communications based on mobile data are also likely to explode.

Negative implications

Telecom companies based mostly on fixed-line communications can be deeply punished. Examples would include Frontier Communications Corporation (NYSE:FTR) or CenturyLink (NYSE:CTL). The old giant telecom monopolies in Europe, like France Telecom (FTE), are also suffering even while they still have significant mobile operations.

The one possible escape route for fixed-line telecoms is data. Data over the air, while seeing increased data rates due to new technologies like LTE, is still limited by the shared medium and the lack of free spectrum. Being a limited and shared resource, it's likely that such communications will remain expensive and performance-limited. This opens a door for fixed-line data, where spectrum is not limited (you can always divide the circuits, build more independent circuits, etc). Fixed-line data is likely to remain cheaper and higher-performing. Data intensive applications such as video on demand are likely to keep demand for performance and cheapness high enough to still warrant fixed-line data and keep it as a competitive alternative.

(Stay tuned, there are more investing themes still to cover.)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.