Inherently Suspicious of Strong Global Markets

by: Enzio von Pfeil

Questions and answers from Dr. Enzio von Pfeil's appearance on Bloomberg TV earlier today.

So what are your thoughts on these strong markets?

I am inherently suspicious:

• We know that the global Economic Time is worsening: look at the slowdown in America, higher rates in Europe, weakness in Japan
• So it seems as if the turnover portion of the profits equation is going to get dented: an excess supply of goods is looming
• Next to a worsening profits outlook, the US market is looking very rich relative to America’s (worsening) Economic Time
• Thirdly, there is no reason to disbelieve the “sell in May and go away” adage: statistically this works

Yet markets keep rising. Why so?

• Companies keep buying back their own shares; that falsely inflates their EPS figures
• Plenty of noise about liquidity, about an excess supply of money
• Then the revolution stoked by the internet: now everyone can play
• And then you have the industrial revolutions going on in India and in China
• So, crazily, people believe that now China is driving the world’s markets. Yesterday’s FT carried some interesting data on China’s market. Its turnover is the second largest in the world (yesterday in Shenzhen: $15.8 bn, and $33.2bn in Shanghai) but China’s market capitalisation (i.e. that of its domestic markets in Shanghai and Shenzhen) is much lower. Here is a market cap totem pole, all in US$:

o America: $16,500 bn
o DJ EuroStoxx: $5,277 bn
o Japan: $4,700 bn
o UK: nearly $4,000 bn, and
o Shenzhen + Shanghai: $2,200

• Add to this that the Chinese domestic markets are closed to the outside world, and we are a little surprised that China has become the Archimedes of today’s markets: it cannot exercise such leverage!

So what do investors do?

• For better or for worse, we remain convinced that if America’s market sneezes other markets will catch short term flu.
• Thus, we have a short on the US market and are cashed up
• We are waiting for America to crack, which will whack global markets. That is the time that we intend to climb back in – but NOT into the American market, or indeed into the Japanese one!
• Once America has cracked, we will load up on China, India and on Korea again.

China: lots of bubble talk – but do the local players really want to prick the bubble?

• Hardly: it is in NO bureaucrat’s interest to stop the party – just now

o The insurers are making a fortune off rising markets, so they can build up cash reserves for a rainy day
o Banks are happy, what with lending rising but funding costs remaining low, so up go margins
o Property developers are having a ball because of the Olympics and because local governments at the provincial and township level want to encourage growth
o Don’t forget the Olympics next year AND the Party Congress this Fall: there are plenty of promotions up for grabs, and nobody wants to disappoint the gods by recommending something as “stupid” as to cool growth and the stock market.

India: have you come up with a new sector theme?

• Not I, but McKinsey, the consultancy.
• They reckon that by 2025, India’s middle and richer classes will dominate consumption
• Besides, they will spend more on leisure, travel and health than the current emphasis in spending, which is on food and shelter

Japan: you are critical of the market, but not critical of a sector. Which one?

• Energy and resources
• We all know that the great scramble for commodities will remain, now that China and India are stoking demand
• So we reckon that one could position oneself defensively in Japan’s companies specializing in the procurement of all hard and soft commodities.