You know something odd is going on in global markets, but do you know quite how odd? Here’s a hint that the level of distortion is getting a bit too weird for comfort. In the US, the number of loss-making mid- and small-cap companies as a percentage of the total is at an all-time high (29%). We can forgive a lot of losses right now (lockdown, etc) and this number often peaks towards the end of a recession. But how’s this for nuts: investors are currently paying a premium for those loss-making companies. They’ll pay more for “no money”, than they will for “some money” (see this week's magazine for how to avoid doing the same). Then there’s this: nearly 80% of initial public offerings in the US come with what analysts like to call “negative earnings” (losses). We could fill pages with indicators such as this – reminders that bullishness is at an extreme and that, while recognising that the madness could continue for a long time, we should adjust our portfolios accordingly.
How? Find where the “prevailing narrative in the market is disjointed from the realistic trajectory for operations in the real world” – in a negative way, says Kennox Asset Management’s Charles Heenan. One example is oil and mining – where prices are finally starting to soar. Oil was back above $60 a barrel this week having effectively gone to zero last spring. So how about buying Shell, says Heenan? No one is investing in supply anymore – “it’s absolutely brutal out there”. That’s partly because prices have been low (low prices lead to falling supply). But it’s also about ESG investing (investing with an eye to environmental, social and governance issues). Big oil firms, like big miners, are not exactly top of the pops with modern institutional investors and their obsession with the optics of their newly acquired moral frameworks. That not only makes it hard for dirty commodity firms to invest in new supply, but also very costly for them to do so: new projects come with new levels of regulatory costs as well as much higher payments to communities (water management, engagement, healthcare, etc) and governments (taxes and royalties).
That’s no bad thing. But it does push up the overall cost of increasing supply. That’s a long-term problem given that fossil fuels still generate 80% of global energy and alternatives cannot yet hit the same scale. It makes little sense, notes Heenan, to vilify the firms keeping our lights on, our ambulances running, our laptops powered, our bitcoin mined (!) and our food refrigerated. Given this, the best way to take advantage of today’s ESG and clean energy enthusiasm is not to invest in the clean energy stocks everyone loves – say, Ceres Power (up 1,000% in the last two years) – but in the old energy stocks everyone still needs (Shell is down 41% in the same period).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
If that sounds interesting (and you can consider this, while also thinking that clean energy and a clear path to “net zero” is badly needed) you might also look at thermal coal, today’s ultimate contrarian investment. Value investor Andrew Hunt notes that supply is static-to-falling, but demand very much still with us. Look perhaps to Glencore in the UK for exposure. If single stock investing is not for you, note that, just as by being a passive investor in the US you are a tech investor, just by being a passive investor in the UK you are a commodities investor: energy and miners make up more than 20% of the FTSE 100 index. Perhaps after years of underperformance, the UK market might finally be coming good.
-
Child benefit tax return rules are changing – what is the high income child benefit charge?High-earning parents will soon be spared the hassle of filing a tax return to pay back child benefit. We explain what’s changing and how the high income child benefit charge (HICBC) works
-
Palmer Luckey: the billionaire flame of the westProfile Palmer Luckey started Oculus, the virtual-reality headset business, and sold it to Facebook for $2bn. Now he’s set his sights on the arms race.
-
Large cap stocks start to struggle – is it time for investors to reassess their focus?Buying quality large caps worked very well last decade. A more volatile world will be a bigger challenge for these star stocks, says Cris Sholto Heaton
-
How to generate income with fixed-interest investmentsPublic debt is overvalued, but other fixed-interest investments now look like a bargain, says Max King
-
Three top-notch Taiwanese companies cashing in on the advent of AIOpinion Eric Chan, investment director and co-manager of the Aberdeen Asian Income Fund, highlights three potential Taiwanese winners in the technology industry
-
Weight-loss drugs could revolutionise the economy – the investments to buy nowThe new generation of weight-loss drugs are a boon for the overweight, but they also promise to change our relationship with food and revolutionise the economy
-
Find tomorrow’s Asian giants while they are still smaller companiesOpinion Nitin Bajaj, portfolio manager of the Fidelity Asian Values trust, picks three Asian companies to invest in.
-
AI will maintain Moody’s market lead, says Stephen ConnollyOpinion Veteran data provider Moody's has adapted well to the modern world, and is one of Warren Buffett’s longest-held investments
-
Is BlackRock World Mining gearing for a recovery?Opinion After a frustrating year, BlackRock World Mining is positioned for growth and to capitalise on the sector's recovery
-
Should you limit exposure to US tech stocks?An end to the AI boom would shake both US funds and global trackers. Here’s one way to trim exposure to US tech stocks
