In this legendary Stockhead series, investment manager James Whelan from VFS Group offers his insights on the key investment themes and trends in domestic and global markets. From macro musings to the metaverse and everything in between, Whelan offers his distilled thoughts on the hot topic of the day, week, month or year, from the point of view of a damn fine professional money manager.

 

Good afternoon,

A note that I’m hosting a webinar on February 15 with some great guests, including Stockhead, talking about the year ahead and how to navigate it. Should be a great evening so please RSVP via this link and I’ll see you there. We’ll cover copper miners, gold, trading strategies and global themes for 2023. It’ll be great.

Now, a little valuation check of the US market…

This is what was expected at the start of the year for US companies pre-reporting.

And now we are halfway through we have enough results to now know – according to Factset – in aggregate, companies are reporting earnings that are 0.6% above estimates, which is below the percentage of 1.5% at the end of last week, below the 5-year average of 8.6%, and below the 10-year average of 6.4%.

Or in visual form…

So, anyone who’s crowing about how amazing earnings have been, keep in mind it’s the old trick of guiding lower before slightly beating. Earnings are still receding and it’s not a secret.

While we’re looking at valuations here’s something showing trailing earnings. Note it’s TRAILING earnings so it’s absolutely not something to dwell on but should serve as a good reminder of where markets can go when everyone is on the crazy juice.

For the record, the forward P/E ratio of the S&P 500 is 18.4x which is about bang on for the five-year average. The market has stopped being cheap.

The Zoom Out

However, when it comes to the conversation of what is “cheap” vs “expensive” I’ll let you listen to one of the masters himself talking about the philosophy of long term investing. Simon Mawhinney, CIO of Allan Gray, is one of the best contrarian long term investors around and I spoke to him on the podcast last week. His insights are amazing as to what we’re seeing locally with regards to value so please take the time and have a listen.

Simon mentions the retail numbers that had dropped that morning as being a sign that retail may have run its course. As mentioned a week or two back I strongly believe the belt tightening kicks in now, if not already. Stay well clear.

The rally in tech in the US almost made it to the 20% mark, making it a bull market, which would be amazing for something everyone is still calling a bear market. Round numbers: can’t stand them.

Short squeeze or options gamma squeeze (that thing that happened during Covid where all the kids buying call options with their stimmy cheques actually drove up the market), or both, tech showed it had a bomb under it last week.

Powell has said he’s calm as a cucumber on where inflation is heading and that we’re almost there. Markets loved it.

Right up until that jobs number on Friday night which was right out of the box and suddenly there’s concern yields are going to have to track a little higher to keep everything under control.

What if, however, we’re entering some kind of surreal sweet spot where inflation slows down while everyone still has a job and the economy grows slowly. That would be something. That would really be something.

If, however, you think that maybe my original thesis is sound that 2023 will peak and trough through this news as inflation comes back, then doesn’t, then causes massive layoffs, then doesn’t, then causes mortgage defaults and so on, then maybe a little profit-taking is in order.

In the spirit of Allan Gray the time to look at defensives may be around now since they’re trading relatively cheap compared to previous levels. Along with the fact I like Europe as well on a flow of money basis, I’m having a good look at IXI, run by Blackrock and investing in global consumer staples.

It’s a healthy “the world isn’t great but people still need to drink Pepsi and buy smokes and soap.”

It also has a big European exposure which I’m happy to be a part of.

inflation economy

Chart is shaping up too, noting that it is an ETF.

‘Allo ‘allo ‘allo

Finally and you know how much I like these, here’s the projected copper discoveries and those that have been made in the past.

Two things we have on the near term horizon is the copper deficit and the oil deficit. Both will become all the more clear to all shortly.

inflation economy

Stay safe and all the best,
James

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.