“It is the everything rally”, said a portfolio manager to Spy over a Laphroig whisky (or three) last night. “Gold, stocks, bonds…except China A-shares.” Ah, there’s the rub. While the US is running hard to the end of year finish line, here in Hong Kong and across the causeway in China, investors are feeling less buoyed. China’s CSI 300 (A-Shares) Index closed at 3,351 last night, more than 100 points lower than it was in July. “China looks cheap and the US expensive right now, but try as one might to persuade people to buy when things are inexpensive, human nature prefers buying frothy markets” the portfolio manager added. He isn’t wrong.
Mariah Carey sang, “All I want for Christmas is you”; instead, Santa (or should that be Fed Chairman Jay Powell) seems to be delivering a whopping year-end rally to make even the most cynical wealth or portfolio manager smile. All of a sudden, the animal spirits seem to be running amok. Sentiment has improved; according to the AAII monthly survey, we are now back to the “greedy” phase. Specifically, bulls outnumber bears by a massive 32%. The S&P 500 has risen 25% since last December. As much as Spy is enjoying the rally, just like everybody else, a few warning signs are flashing. The clearest one: a new four times leveraged S&P500 Exchanged Traded Note (ETN) was launched this week in the United States with the ticker, XXXX – not to be confused with an Aussie lager of a similar brand name, of course.
The blurb from issuer, BMO, “XXXX is a leveraged ETN that aims to provide amplified exposure to the US large-cap sector. Its objective is to quadruple the daily performance of the S&P 500 total return index, which encompasses stock prices and dividends from the 500 largest US equity market companies.” When punters are snapping up that kind of optimistic leverage, Spy does worry a little. Good luck with that.
The Financial Times had a fascinating report out this week saying that Asia Pacific has become the fastest growing ETF market in the world. This is according to Invesco’s head of ETF business development and capital markets for Asia Pacific, Tom Digby. In essence, Asian investors are buying ETFs, not just on their domestic markets but in Europe and the US too. This does not surprise Spy one little bit. Digital brokerages have enabled local investors in markets from Taiwan to Singapore to Australia to easily buy America- and Europe-listed funds. With the exceptional liquidity provided by those markets and low dealing costs, it is hardly shocking that Asian investors are stocking up. According to Digby, “ETF assets in the region are growing at between 26% and 30% per year in countries from Australia to China to South Korea.”
Spy enjoyed the 2024 outlook piece from Capital Group. It is worth reading in full, here. This particularly caught Spy’s eye. “However, you’ve probably heard by now that the US stock market is top-heavy. What you might not know is the S&P 500 Index is more heavily concentrated than it was at the peak of the dot-com era. (Spy’s emphasis) As of September, the five largest companies in the S&P 500 accounted for 24% of the market capitalisation of the index. That compares with a 19% weighting for the five largest companies in the index as of March 2000…without the so-called Magnificent Seven, the S&P 500 would have posted a decline [in 2023]”. Buyers, you have been warned.
Asset manager, Ninety One, has an insight piece out on our era’s current scourge – inflation. The authors, Alex Holroyd-Jones and Iain Cunningham, make the salient point: “Throughout history, inflationary episodes have been rare. It has therefore been difficult for investors and policymakers to draw parallels of today’s experience to history.” They are warning that policy makers may “risk making the mistakes of the 1940s and risk ‘keeping at it’ for too long”. Perhaps with the Fed’s pivot this week, an old dog has been taught new tricks.
Spy was told by a secret mole this week about an HR meeting, at a London-based asset manager, that focused on micro-aggressions in the workplace. Apparently, a “senior” person pointed out that “telling people you are fluent in another language and can conduct business in another language is a micro-aggression and would need cautioning by the HR team for making others feel uncomfortable”. This kind of idiocy (and intellectual nihilism), which is rife in corporate Britain and United States, would get short shrift here in Asia, where speaking multiple languages fluently is not only considered a positive trait, but in fact almost a requirement for most senior jobs.
If you are planning a holiday over the Christmas period and looking for something to read, Spy can heartily recommend, Drive: The Surprising Truth About What Motivates Us by Daniel Pink. The book is about understanding what really drives people and, spoiler alert, it is seldom money. Building teams where the only incentive is financial reward is unlikely to prove productive and durable in the long run. Pink ably dispels the myth that carrot and stick rewards the best way to motivate people. Purpose is far more important.
Fun fact: Apple’s market cap is now almost the same size as the entire French bourse. Apple is worth $3.1trn and the combined value of Paris listed stocks is $3.2trn. This is despite a massive rally in LVMH shares. Until next week…
