Sunday, December 23, 2018

Now Is A Time To Buy Stocks

Now Is A Time To Buy Stocks where there is fear and uncertainty in the market. This opportunity where valuations are down across the board including high growth stocks and value stocks has valuations for S&P at 14 times forward earnings. It is quite possible that valuations can get further attractive over the next while into 1Q2019. However timing the bottom is a fools errand and dollar cost averaging down over the next few months is a reasonable approach. The previous such market dislocations including Jan 2016 (Commodity Cycle Bottom), Jul 2015 (Chinese Market Crash), Jun 2012 (Euro Crisis), Sep 2013 (Emerging Market Bond Crisis due to Perceived Fed Rate Increases) Aug-Oct 2011 (US Govt Shutdown etc.) have all been good opportunities looking back.

Below are some of the geo-political and macro economic factors at play in the market over the next few months. It is good to remember that the works is uncertain all the time and investors focus on it at some times while they ignore it most other times.

Market Outlook For Next 6 Months

I believe a confluence of political and macro economic issues will weigh on the stock market over the next few months. These will be compounded by swings in investor psychology which can lead to sharp sell offs due to herd like mentality. 

1. China US Economic Warfare 
China and US are engaged in an economic and geopolitical warfare that will last a long time and is inevitable. There may be a truce but this is a 20 year battle. China has got economically strong and will overtake US economy in next 10+ years due to their faster growth rate and higher population which is moving from semi skilled to highly skilled economy focused on services and higher end manufacturing. This economic might will be translated into military spending and enable it to challenge US as the #1 superpower. China has also been running a smart operation to steal US and Global Intellectual Property. US wants to remain #1 so they will challenge and try to prevent rise of China any further. US and China will target each other’s economy and companies and this will create winners and losers in industries and specific companies. Some US manufacturing and service and tech companies will benefit while other agriculture companies and some companies exposed to Chinese customers will be negatively impacted. 
Companies may reduce new investments and consumer sentiment and investor sentiment may be affected. Strong employment in US and rising wages may counter this effect. 

Brexit Mess and Anti Immigrant Right Wing Movement in Europe
UK is mired in a mess with Brexit with a lose lose options all around and a deeply divided country. EU countries need to cut down immigration or else there will be a huge backlash as in US from the voters. The uncertainty and trade friction caused by Brexit will reduce consumer sentiment and business investment in the next 2 years and can effect the economy. With lower sentiment house prices and demand for luxury goods and big ticket items like cars may go own in near term. 

US Political IssuesI believe Trump administration may run into issues with legal matters if they conspired with Russia to tilt the 2016 US presidential election. I think this will be ongoing and may or may of resolve before 2020 elections. Regardless of outcome I don’t think this will impact the US economy in the long term as the lower taxes and reduced regulation and capitalist system will favor investors and company profits.

Trend Against Large Cap Tech Monopolies
Sentiment has turned negative against large cap tech monopolies like AMZN, GOOGL, FB etc in US and Europe and globally. Europe will likely increase regulation and also enforce minimum taxes on revenue. However the monopoly and market position of tech giants is so strong that their business juggernaut will continue to move forward. Growth rates of earnings may slow and hence the P/E multiples may continue to contract. 
 
Interest Rates & Monetary Policy
Possibility of accelerated interest rate increases in US were a risk. However the intervention of Trump and other factors now seem to imply the US Fed won’t raise rates much from this point.
This could be a positive for emerging market economies like Brazil and India. Brazil has elected a new pro market leader after 15 years so investment sentiment and returns are expected to be good and BRL weakening over last few years has made the agriculture and other industries very competitive globally. In India outcome of April 2019 elections may have a major impact on international investor sentiment.



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