updated archivos - Page 9 of 9 - KNG International Advisors

Monday 5th of July 2022

Market volatility remains elevated ...

With ongoing concerns about inflation and weakness in the economy weighing on market sentiment. For the stock market, this means volatility is likely to continue and (to echo last week’s episode) we probably have not yet seen the lows in this bear market for stocks.

Periods of market churn like we are currently living through typically punish speculators but can greatly reward the patient and long-term minded investor. When prices are falling, all else equal, the investment outlook for all investment opportunities has improved.

However, there is a huge difference between a bad investment opportunity being less bad, because the price has come down, versus a high-quality investment opportunity which is even more attractive now with a lower price.

An example from outside the stock market is probably useful now. Imagine first, an advertisement for a gambling website, or betting store, close to where you may live. One day a new offer is presented with an 80% reduction in the price of placing large bets. All else equal, this is a better offer than before, but this is still a bad investment even after the 80% reduction in price. It’s a bet, plain and simple, it is risky and should be avoided, especially with large sums of one’s savings or investment capital. These are our ‘falling knives’.

Now imagine a high-quality residential property close to where you live. You know it well, it is spacious, in a nice and pleasant area to live and is in high demand. One day this property is on sale for 80% off its previous price. This is an example of a ‘fallen angel’.

Financial markets today are full of both falling knives and fallen angels, with prices of everything coming down, offering investors a wide array of opportunities to ‘buy the dip’ across multiple asset classes and individual stocks.

Some of these are very risky ‘falling knives’, where the lower price on offer does not necessarily mean investors should go anywhere near. Bitcoin and crypto currencies are a good example of this. Bitcoin is down 71% from its highs in 2021, Ethereum, another popular crypto asset, is down 75%. Many speculators argue this makes them better investment opportunities now. We would argue these are falling knives and trying to catch them would be a grave mistake. Any price above zero for cryptos in our view is too high.

Many stocks also exhibit similar characteristics, still trading on very high valuations despite major declines in share price. Tesla stock is down 45% from its highs last year. Compared with cryptos, at least investors own something in the real world with Tesla stock, in this case an electric car manufacturing business, but again, speculators are tempted to start buying Tesla stock at these now lower prices. Again, we caution against catching a falling knife here, as valuation levels still remain eye wateringly high relative to other auto companies and other more reasonably priced assets in the stock market.

Sadly, many retail investors in particular are falling into the trap of putting new money to work in these and other similarly risky assets, buying the dip and adding capital to speculate on prices of over-priced assets.

Price declines alone do not make great investments.

What matters is price relative to underlying value and the cash flows the asset you are buying will generate.

Some asset prices are down and rightly so, they were just too damned high and should be avoided even at much lower prices.

Finding the fallen angels, or at least investing in strategies where this is a stated aim, is where investors should now, we believe, be focusing their energy.

Some of the leading businesses in the world today, in previous market downturns, traded down 50% or more, seeing prices decline along with the rest of the market index at the time. Amazon was down 85% from its peak in the 2001-2002 sell-off. These price declines of our ‘fallen angels’ were accompanied by major declines in the price of the ‘hype stocks’ of the day, which never recovered.

These ‘fallen angels’, when bought at or close to market lows, turned out to be the best investments of the subsequent two decades. Amazon bought in March of 2001 would today have generated a 200-times return (in other words a $10,000 investment would be worth $2 million after 20 years).

The current market turmoil will be creating similar opportunities for the long-term minded investor.

Monday 5th of July 2022

Afirmamos que este año (2022) representa un momento excepcional para los mercados financieros…

Last week, we claimed that this year (2022) represents a rare moment in financial markets which typically only occurs once every decade or so. A year where the financial paradigm changes, where the old rules and investment strategies that worked stopped working, and where new approaches will be needed for success in investing. 2008, 2001, 1987, and 1984 are relatively recent examples of these.

These periods of change in financial markets are almost always accompanied by a bear market for stocks. A bear market is a market which trends down for a prolonged period, typically between 3 months and as long as 2 years in some cases. And there are different types of bear market too. Three in fact.

If we are right, and 2022 turns out to be as important as previous moments of market dynamic shift like 2008 and 2001, understanding what type of bear market we are in now is critical to determining how investors should position themselves. It also helps us estimate how long the bear market will last and when we can start thinking about the next bull market.

We think of the three bear market categories as being: (i) structural, (ii) event based, and (iii) periodic.

A structural bear market is one driven by a major structural re-adjustment in the economy. The 2008 bear market was structural, as it was driven by a global collapse in confidence in the banking system following the bankruptcy of Lehmann Brothers. The 1929 crash and subsequent depression is another example.

Structural bear markets are typically very long in duration, often lasting many years, unsurprising given the structural causes, as these negative factors take a long time to wash out of the system.
Event based bear markets, the second type, are very different. These are the shortest in duration and are caused by, you guessed it, a specific and usually unforeseen event. The 2020 bear market is a classic event based bear market, triggered by the COVID-19 pandemic.

A highly uncertain and sudden event changes market sentiment and asset prices decline quickly in response. Since these are not driven by major structural problems in the economy, these bear markets often resolve themselves quickly, as weas the case in 2020 with the market rally and strong bull market in the April – December 2020 period.
La tercera categoría de mercados bajistas es la periódica o cíclica. Se trata de mercados bajistas desencadenados por las últimas fases de un ciclo económico y la consiguiente subida de los tipos de interés que se produce en las últimas fases de un mercado alcista. Normalmente, la inflación aumenta, los bancos centrales suben los tipos de interés, el crecimiento se ralentiza y se produce un mercado bajista en los precios de los activos. ¿Le resulta familiar? Debería, ya que esta es la categoría de mercado bajista en la que creemos que nos encontramos actualmente.

What does this mean for investors?

Periodic bear markets typically last between 9 and 18 months and they are not accompanied by major financial crises, so the rally out of these markets is often quite strong, usually in more value-oriented stocks early on, followed by growth stocks later in the rally. The 2001-2002 bear market is a classic example of this. The recession then was mild, there was a bear market, followed by a 7-year bull market in stocks.

If we’re right, we’re currently 6-9 months into this bear market. The bad news is: that probably means there’s going to be a bit more pain in markets before we can start thinking about a sustained recovery in asset prices. The good news is that, well, we’re already 6-9 months into this thing, and that means, based on historical examples at least, we’re probably less than 9 months away from the end of this bear market.

Another positive outcome of this prediction being right is that the subsequent bull market should be a strong one, given the lack of a major structural headwind to the economy. If the last market cycle with these features is anything to go by, the 2023-2030 period would be one of very strong investment returns, particularly for those with a renewed focus in aligning their investment exposure to investments trading on low and reasonable valuations today, that also offer exposure to the major drivers of growth in the global economy during the next bull market.

Before the 2020 pandemic, the 2011-2019 economy and accompanying bull market, was often described as a Goldilocks economy, one where inflation and growth were neither too hot, nor too cold, but ‘just right’ to sustain asset price appreciation and a strong economy.

Investors should not count out the possibility of a return to the ‘Goldilocks economy’ after the current market turmoil passes. The factors that gave us such an economy before the pandemic are still there, under the surface (ageing demographics, new and deflationary technologies), and may reassert themselves. Though we’re not predicting this particular outcome, its realisation would be very bullish for stocks in the long-term.