Financial Musketeers

Pfäffikon SZ, Switzerland – 2018 had a dynamic start at the global stock exchanges, which was followed by increased volatility. Many investors think that volatility causes an increased risk, but this is nonsense. Volatility offers investors with a decent horizon and a limited margin many opportunities to adjust their portfolio. More interesting is the question where the volatility suddenly comes from.

The world is changing at a rapid pace. Many business models are being demolished or are about to collapse. Also, geopolitical and permanent shifts are visible and financial musketeers try to outwit the established order via crypto coins. Trade barriers are raised with the result that different countries look up each other economically or exclude each other, which was previously unthinkable. And then we are not talking about the energy transition or the demographic gorilla that will also shake up the world. A lot of unknown territories where nobody can tell you about something meaningful.

Polished spreadsheets
Meanwhile, the investor is relying on the bright prospects of analysts, who are already worthless in advance. At first glance, we live economically in a Walhalla. Low inflation, relatively affordable wages, decent corporate profits; what does an investor want more? All this has caused euphoria in financial markets, where the new US President Trump still gave an extra push. It is not inconceivable that the economic fairytale will last for a while. Investors do not yet think about the huge blow that comes after that. But that we are closer to the end of the fairy tale than at the beginning of it, is clear. The market feels like 1997, for whom it can still remember.

Cash flow
The positive stock market is now being worn worldwide by a handful of American tech companies. All of this worries us, as the difference in market value that has arisen between growth and value stocks will not hold. It is not surprising that the stock exchanges have become more volatile. Some investors are very clear about shifts within their portfolio to pure quality; they already see the rain. But this is not easy because of the valuations. Based on generated free cash flow, and in terms of market value, we live in 2028 instead of 2018. No questions asked. After all, slowly generations develop who think money is free, services are free, the news is free, and the stock market always goes up. And if the stock market does not go up, the government intervenes. Various financial musketeers make good use of a seeming multitude of unlimited driving forces.

Nevertheless, the price will be high –if not unaffordable– for many. Emotional richness is a dangerous (political) phenomenon. When this price is paid, no one knows and may take years. However, it is a no-brainer that the next financial crisis will cause 2008 to appear pale. I would not be surprised that (value) strategies that have worked well for more than a hundred years will make a comeback on the global stock exchanges.

It remains for me to wish you a good trading week.

Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.