We recently hosted a 2019 Market Review & 2020 Outlook with Blaine Rollins, CFA, author of our popular 361 Weekly Research Briefing. We had several interesting questions come in from attendees so we thought we would use this week’s blog to share Blaine’s responses.
If you would like to listen to the entire webcast, you can access the replay here.
Question: Does the technology sector in the next decade lead now that the definition of a technology company has broaden to include more companies, like Netflix?
Blaine: There are always going to be great companies working on something new and different in the technology space. Right now, I prefer some of those more cyclical exposures in the technology sector, like semiconductors or hardware-related areas, over the average technology company.
You’re going to come across individual companies that are coming out with a product or service on which they have a virtual monopoly—that’s a name you want to own in your portfolio. You’re going to find that not only in technology, but also in the healthcare, consumer discretionary or even consumer staples sectors as well. For example, if you look at some of the meat-substitute products, that is an example of some revolutionary new products in a boring, conservative sector.
I’m not saying don’t own technology just because valuations are high, there are always going to be companies that are going to surprise you. Looking back to the early 2000s, some of the emerging tech companies surprised us to the upside in revenues and earnings, but don’t forget that for some, their stock fell significantly in price while they were growing into the mega companies they are today.
Question: Why is the consensus view that the U.S. dollar is going to decline? Do you share that view? Which country stock market would benefit from a weaker dollar?
Blaine: I view it on more of a relative basis, not that our economy is going to do poorly, I think that my bet on a weaker dollar is based more on the fact that a lot of the world has been hiding in U.S.-based assets, debt or equity, either because of the uncertainty or the strength of U.S. companies in the last few years.
On the margin going forward, I think that if we get to see better global growth numbers it will be more leverageable to those companies in Europe, Japan or even around Asia that have pulled back because of these trade wars. So, I think you will get a little bit more of a slingshot effect in other countries and economies, and thus money will leave its safe haven status in U.S. dollar-based assets. So, I believe investors may make more money being in non-U.S. dollar investments.
Question: How important is the trade deal for the Chinese market? What’s your outlook for the Chinese market?
Blaine: With Phase 1 of the deal signed yesterday, it shows a commitment on both sides to settle these trade negotiations. Phase 2 is equally important. There were some comments recently about how they were working on it, whether or not it would be in place before the election is unknown.
I think China is on a positive trade track, but I will worry about it if there is negative news updates on a U.S./China trade deal. Hopefully we will start seeing soybeans moving, raw materials moving, hogs moving. With the swine flu in Asia over the last 12 months, we really missed an opportunity to sell a lot of pigs over there. We would like to move this deal along and see our trade numbers flying again.
Question: Do you track the Wilshire to GDP ratio (better known as the Buffett Indicator)? What significance do you place on that and what do you feel it’s pointing to?
Blaine: The more data the better.
Market Cap to GDP is a good measure to consider when looking at current market valuations. I included and linked the current chart below. And as you would expect, it is at all-time highs. Our current low interest rates in the U.S. have helped pushed stock earnings multiples to the top decile of history (currently in the 18-19x range). If you look at this chart for the U.S. versus the one for Germany below it, you will see that Germany still has yet to make new highs. This should be the case given the lower returns and more economic issues facing Europe.
One important factor to consider in looking at the Wilshire 5000 today is that it is missing about 1/3 of its components as there are only about 3300 companies in the index. You can look at the success of private equity in taking many public companies private as well as―many many larger public companies buying private companies before they make it to the public markets (like YouTube or Instagram in the internet space). So it begs the question, how much larger would the Wilshire 5000 be right now if it had 50% more listings than it does currently. Even if these are smaller companies, maybe it would be 10% larger? If that is the case, then the current string of data on this chart could be even more elevated.
Hear more in latest webcast, 2019 Review & 2020 Outlook with Blaine Rollins, CFA >