Investment Strategy

When the wind blows

Rock-a-bye baby, on the tree top

When the wind blows the cradle will rock

When the bough breaks the cradle will fall

And down will come baby, cradle and all

Traditional lullaby for children

Hurricane Michael is barrelling towards Florida. Reports suggest its the biggest storm to hit the US in 14 years, and possibly much longer. Good luck to those in its path.

At the same time, stocks are selling off. The S&P 500 is down 1.3% today, and the NASDAQ Composite, which is more tech-heavy, is down 2.3%. Certain big, tech or “new economy” stocks are taking substantial one-day hits. Netflix is down 5.7%. Amazon is down 3.5%. Tesla is down 3%.

Of course, when stocks are placed right “on the tree top” (see the lyrics above) – meaning the market prices show very extended valuations – it doesn’t take more than a puff of wind to blow them off. Then they fall.

What’s the puff of wind that’s got investors worried this time? It’s probably not the hurricane. More likely, it’s that US inflation fears have been stoked. The producer prices index (PPI) increased a surprisingly high +0.4% in the month of September. The cost of business inputs is rising.

The fear is that this will feed into consumer price inflation (CPI). If that happens, then it puts further upward pressure on interest rates and bond yields. In turn, this means stock investors demand a higher return, which weighs on prices.

 

Across “the pond”…

Meanwhile, the Brexit saga continues in Europe. Crunch time is nigh. Will there or won’t there be a deal?

Next week, a 28 nation EU summit will look at the deal. Even if it gets approved by the EU, there are still doubts about whether any deal will get through the British Parliament. We’ll see.

In the meantime, the British economy chugs along. The economy is expected to grow 1.5% this year, and unemployment is low – at just 4%. Brexit is now expected to cause 5,000 financial jobs to move from the City of London (financial district) to other EU cities. To put that into perspective, it’s only about 1% of all the City jobs, so hardly a disaster (and a long way from the 50,000-type figures being bandied about a couple of years ago).

 

Down south…

Jumping from Europe to South America, Brazil is the latest place where the political status quo looks set for a shake up. In first-round presidential elections on Sunday – and not in line with recent opinion polls – Jair Bolsonaro got 46% of the vote, far ahead of second-placed Fernando Haddad, with 29%.

With all other runners now eliminated, those two will go head-to-head in the second round on 28th October. Clearly, Bolsonaro only needs to pick up a modest amount of extra votes to secure the presidency.

Bolsonaro is usually described as “far right” in the media, which – at least for me – conjures up images of goose-stepping blackshirts and such like. But the term is used so loosely these days that it’s practically become meaningless. So I’ll give a (very) brief summary in this case.

Bolsonaro appears to be politically incorrect in his speech and has sympathies for Brazil’s last military dictatorship. He preaches a message that’s tough on crime and insecurity (a big issue in violent Brazilian cities), is in favour of reduced restrictions on gun ownership, and (in theory) has a relatively liberal approach to the economy and markets. Haddad, on the other hand, is a leftist academic from the big-state school.

Brazilian stocks rose on Monday. But, as they say, the proof of the pudding is in the eating. I still recommend staying away from Brazilian stocks. Not least, because they aren’t exactly cheap given the uncertainties (the MSCI Brazil index has a P/E ratio of 16.5).

Meanwhile, a little further south, Buenos Aires is hosting the Youth Olympic Games. What’s more, the Argentine peso seems to have stabilised, finally (at least for now). One US dollar now buys 37.44 pesos, compared with 41.23 on Friday 23rd September. Put another way, the peso has actually strengthened 10% in recent weeks.

How long it lasts is anyone’s guess. But at least it gives everyone a bit of breathing space, after the peso lost more than half its value during 2018.

Last night I had dinner at a smart restaurant in the upscale neighbourhood of Recoleta. Dinner for four, with wine, came to about US$100. That’s very cheap by global standards.

Those kinds of bargain prices won’t last forever. Just as they don’t when stocks of fundamentally solid companies drop hard due to temporary concerns. Recently, I’ve found a prime example of such a stock. I believe the price could easily double, or even triple, over the next couple of years.

The company in question is going through a restructuring and simplification, and the stock is deeply oversold. It even has a juicy 5% dividend yield to collect. That’s while investors wait for the various strategic steps to be implemented over the coming 12 to 18 months.

I’ve made huge profits on such situations in the past. I expect this one to be a similar story. All it requires is some careful analysis (to find the opportunity) and a little patience (to let it pay off). I will provide the former if you can provide the latter.

If you’d like to find out more, and to make sure you don’t miss out on this opportunity and many more, click here.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.