How Screwed Up?

Howard Marks, a brilliant man, and hugely successful investor appeared on CNBC recently and was asked what he thought of the overall US market valuation.

He answered that it was down 15%, but did that really represent how ‘screwed up’ the US economy is? The implication I think being no, it did not.

Also, and off topic his latest letter to investors was a long piece in which he posed a number of questions related to the current situation and in each case, he concluded the answer was unknowable right now.

This reminded me that there are indeed only two types of people who make market predictions.

Those that “know they don’t know” and those that “don’t know they don’t”.

So back to the -15% screwed up question.

His observation is concerning but on looking deeper, the granular figures tell a more nuanced story.

‘THE’ market is the totality of everything. It is the combination of Technology and Airlines, Software and Cruise Liners, Hotels and Pharmaceuticals et al.

-15% then is the average of everything, which means it’s ‘not one thing specifically’ and this distinction is important.

Take one of the biggest casualty sectors, Airlines:

EasyJet is -60% over 3 months.

ICA which is British Airways -65% over 3 months.

Is that representative of the reality of the damage suffered and future duress?

Maybe/maybe not but it’s a lot more than -15%.

By comparison Big Tech.

Year to date:

Amazon + 29%

Microsoft +11%

Apple -5%

So up because relatively unaffected – Microsoft.

Down a bit because they are affected in some areas but not others – Apple.

Up big because it’s had a huge boost – Amazon.

Entertainment/Streaming

Netflix +35%

Disney -29%

Disney has a streaming platform á la Netflix which is good, but theme parks and movies in cinemas are not open, which is really bad.

Pharma and Banks

Johnson&Johnson +4%

Lloyd’s Bank -50%

Enough said!!

The markets are plainly choosing to buy the relative winners; companies either largely unaffected by the shutdown or actually enhanced. They are hammering those companies that are heavily impacted.

As a further example the US REIT index (commercial real estate) is down around -30% in total.

But within the index there are wildly different company performances.

Prologis (builds smart warehousing for Amazon etc plus operates data centres) YTD -1%

Simon Property (biggest US operator of A-grade malls, all the top brands are in them) YTD -70%

Conclusion

-15% is the average fall, but I looked at the main sectors individually and could not find any that had fallen by that amount.

The average of -15% it seems consists of:

Global Tech ETF -3%

Global Healthcare -4%

Global Property -30%

Global Aviation -55%

So, what does this mean or as Howard would ask, And What Then?

An unknown from here is whether the sectors that have stayed price-strong can in fact continue unscathed. Do the Tech and Pharma sectors deserve their current prices?

Certainly, by comparison there is not similar optimism in the prices of airlines or real estate.

My take, for what it’s worth, is that currently those that want or need to hold shares are crowding into the sectors they think safe, which possibly as time goes on and prices go up, makes them less safe.

As Bruce Flatt, the CEO of Brookfield says.

For great long-term investments, you need to go where the crowd is not; that’s where compelling value lives.

This will be the theme of the next blog.

Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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