If you know where to look, there’s lots to buy

Markets look pricey,but there are actually many more stocks trading below average valuations than usual, says Merryn Somerset Webb.

952-eds-letter
Politics matters but price matters more

Global investors are more bearish today than at any point since the financial crisis. That, at least, is what the latest Bank of America Merrill Lynch (BAML) survey of fund managers tells us. They have, they say, the lowest allocation to equity markets since March 2009. Some data even suggests that, in the US at least, the bond weighting in portfolios exceeds that of equities. That's highly unusual (if you want to make inflation-beating long-term returns, you need equities). So what's spooking managers?

BAML's chief strategist Michael Hartnett puts it down to worries about recession; about trade wars; about high levels of corporate debt; and about "monetary policy impotence" the possibility that central bankers can't do much more to stimulate debt-ridden economies. This makes some sense. But long-term readers will remember that March 2009 was the bottom of the bear market of 2007-2009; and know that stockmarket returns are only partly about these things. Politics (in the form of a trade war, or even a long cold war between the US and China) matters far more to markets than it did a few years ago. But still, barring political apocalypse, the most important factor behind your returns is the price at which you buy.

Here it gets complicated. Markets look pricey, says Societe Generale's Andrew Lapthorne. But look closer and you'll see a huge "polarisation of value". Stocks that operate as bond proxies (ie, that rise with rising bond prices) have become pricier, while "more cyclical and negatively bond-correlated equities have seen valuations slump to levels normally associated with a recession". There are actually many more stocks trading below average valuations than usual. So much so, you could almost say that while the average equity market isn't cheap, given that the overvaluation is concentrated in fewer stocks than usual, the average stock is. If you know where to look, there's lots to buy.

Few people would think of the UK as home to a group of world-leading engineering firms. They should think again. As Dr Mike Tubbs notes, the UK is a hotbed of international engineering brilliance. For two reasonably-priced stocks to think about, turn to this week's cover story.

This week, we review Bitcoin Billionaires, a book on how the Winklevoss twins overcame the disappointment of "derisory" compensation from Mark Zuckerberg (for their contributions to founding Facebook) to make a fortune from cryptocurrencies. Dominic Frisby wonders if Zuckerberg may be about to have the last laugh? Facebook is backing the launch of a new crypto, Libra, one that (thanks to the 2.7 billion users of Facebook products) could get traction at a speed of which bitcoin bulls couldn't dare to dream.

Bitcoin (now ten years old) hasn't reinvented money, nor improved many people's lives (the Winklevoss family aside, of course). Libra, says Dominic, may not be a particularly pure crypto, but it "could still be world changing". For more, see Anthony Hilton's thoughts on modern payment systems (it's all about China) and listen to our latest podcast on the topic. I haven't been especially interested in cryptocurrencies so far. But, as you will hear, I'm very interested in Libra.

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Robin Geffen: dividend cuts aren't all down to Covid
Stockmarkets

Robin Geffen: dividend cuts aren't all down to Covid

The seeds of recent dividend cuts and cancellations were sowed many years ago, says veteran investor Robin Geffen.
25 Oct 2020
Dividend payments will take a long time to recover
Income investing

Dividend payments will take a long time to recover

Companies are gradually resuming dividend payouts, but we can expect only a modest rebound in 2021, says Cris Sholto Heaton.
25 Oct 2020
“Big Finance” comes out of its decade-long slump as bankers bounce back
Stockmarkets

“Big Finance” comes out of its decade-long slump as bankers bounce back

The financial sector was hammered by the crisis of 2008. Now, bankers are rediscovering their swagger, says Matthew Lynn.
25 Oct 2020

Most Popular

Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
UK post-Covid recovery stocks: these 20 companies could be set to rocket
Share tips

UK post-Covid recovery stocks: these 20 companies could be set to rocket

Finding stocks with the potential to rise tenfold or even further is far easier said than done. But the pandemic has produced the most promising backd…
22 Oct 2020
Why commodities could be the best investment for 2021
Commodities

Why commodities could be the best investment for 2021

There’s plenty for investors to worry about right now. But things will inevitably recover. And the sector most likely to do best when they do, says Jo…
22 Oct 2020