Markets look good but doubts over Apple still
Since our correction in the second half of 2018 the markets have recovered nicely.
The big story was the US-China trade war and that seems to have settled down. Brexit, as I have said many times, is a kick-the-can event and if the market really believed a crash-out was realistic, prices would be very volatile and they are not.
President Donald Trump has become ineffectual. I suspect we are seeing the last actions of his presidency.
His best bet is to turn statesmanlike and try to recover some credibility before he leaves.
So the markets are calm —very calm — and that means stocks will rally a bit.
Central Bank policy is very dovish and supportive. Interest rates are still extremely low and the US Central bank has backed off their aggressive raising outlook.
The big story this year is growth — European, US and global. That will determine the economic outlook going forward. Low growth keeps Central Banks accommodative and therefore supports stock markets.
That is not good for depositors though, and they have a big decision to make. Lose value to inflation — as the buying power of their deposit depreciated over the years — or risk entering the investing market.
Falling global growth is concerning especially set against the level of government and corporate debt. But because interest rates are so low, it will not lead to a crash. We may just flatline so returns will be gained by hunting out value.
Many investors took a hammering last year especially in December, mainly because standard investment products follow the MSCI world index and that means 50% plus exposure to the US market, regardless of value or outlook.
Passive templated investments can be good when the market trends as happened from 2009 to mid-last year.
However, when that rally gets exhausted, you run the risk of zero returns for a number of years as prices hover or indeed losses if they correct.
Excessive adjustments or trying to predict market dips and rallies is futile but occasionally it is sensible to examine the assets you hold, how they are performing and their ability to give you returns into the future.
Now is such a time. Despite the strong fight back in stocks since the start of 2019, I would still argue longer term gains will be in markets outside the overvalued S&P 500, FAANG (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) and the overvalued US dollar.
Take Apple as an example — why a 40% drop last year?
Because it is too expensive relative to earnings, margins are continuing to contract in what is a very mature market and as yet, the market is not sure whether Apple will be successful in their plan to increase higher-margin services revenue.
Nobody knows what the future holds, Apple is a huge component of the US indices, the stock has acted weak relative to the market since earnings — that’s not a good sign for Apple.
We at Baggot believe that while valuation is a poor predictor of returns in the short run, it is the best predictor of returns in the long run. Buy stock that is cheap (and exhibits strong financial stability) and in the long run, you beat the market and carry less risk.
Looking at Apple from a valuation perspective does not bode well for the stock. Samsung trades at six times its earnings, while Apple trades at 14 times. Apple is very expensive relative to peers so we see no margin of safety built into the stock and would avoid it. If you wish to have exposure to the sector, we prefer Samsung, simply because there is a higher margin of safety built into the price.
There are value investments out there. We just need a little more effort to find them.
