Investment

5 current investing themes and what the opposite trade looks like

Published

2 years ago

January 13, 2023

Peter Hodson: Contrarian investors who take the opposing view to the crowd can often make big investment returns

Asset bubbles have popped everywhere, but they’ll be back. Photo by Frank Gunn/The Canadian Press

One thing I love about the stock market is that there are millions of debates every day. That stock you love and just bought? Someone didn’t like it much and sold it to you. That stock you hate and couldn’t sell fast enough? Someone else loves it and is scooping it up.

Every sell or buy, every day, has an equal and exact opposite opinion. If not, no trade occurs. It is fascinating. Take Patriot Battery Metals Inc., the best-performing stock last year in Canada. Someone in January 2022 didn’t like it and sold it at 41 cents. Today, it is $7.10.

The debates are not limited to stocks. The same occurs for bonds, gold, cryptocurrencies and anything else that trades. It can also extend to themes, where contrarian investors who take the opposing view to the crowd can often make big investment returns.

Considering this, let’s look at five current popular market themes, and discuss the opposing side of things.

The days of easy money are over

Stock markets had a good run when interest rates were declining, and, following the pandemic, many countries went to essentially zero per cent interest rates (and lower). This so-called free money resulted in a buying frenzy, but most experts now expect market weakness as interest rates keep ticking higher.

This theme makes sense: higher interest rates make stocks less attractive. But the other side of this argument notes that a global recession might change the picture very, very quickly. The bulls say rates could move down just as fast as they moved up. A China slowdown, or some benign inflation numbers might be all it takes. In a recession, central banks lower rates to stimulate the economy. Cheap money might return one day.

Asset bubbles are dead

The free money discussed above certainly resulted in plenty of asset bubbles, no more obvious than the non-fungible token (NFT) frenzy, where digital images of apes traded for hundreds of thousands of dollars. Bubbles have now popped everywhere as investors realized some asset prices were just ridiculous, and the only way to make money was to find someone late to the party. But bubbles will be back.

For centuries, promoters have found ways to tap into investors’ greed, and, no matter what investors say now, there will be future bubbles. We have no idea what these will be (sorry), but there will be assets, commodities or something else that captures investors’ imaginations — and propensity for greed — and lots of money will be made, and lost.

Globalization is finished

The pandemic, the Ukraine war and shipping issues have combined to create all sorts of problems for manufacturers. Supply chain issues have brought entire industries to a standstill at times over the past two years. Companies are now scrambling to source domestic supplies. Countries are actively encouraging domestic development. “Globalization is dead,” they say. But is it, really?

Companies will still seek out lower costs. Countries with cheap labour, power and other advantages will continue to be attractive to companies trying to compete on costs. Companies may look for multiple sources of supply, but what will this do? Likely just further increase competition, keeping costs even lower. At some point, contrarians say, the quest for profits through lower costs will result in globalization becoming a trend once again.

Yield is everything

Right now, investors are scared and looking to guaranteed investment certificates at five per cent as a place to hide while the world sorts itself out. Certainly, five per cent looks better than the one per cent offered a year or so ago. Investors want dividends, they want safety. But, again, there is an opposite side of things.

The weak stock market has changed valuations on plenty of sectors, and many contrarians see bargains in the market while everyone else chases yield. Sentiment can change quickly. If the stock market starts performing really well, a five-per-cent GIC might not be so attractive to some investors. We will never underestimate the power of greed. Markets have been weak, but often bounce very nicely after declines.

The tech sector is dead

The sector has not been fun for the past 18 months. But dead? Does anyone really think tech is going to be less involved in our lives in the next five years? We highly doubt the sector is going away any time soon. Rapid developments in artificial intelligence may change our lives as much as the internet did. Companies continue to pour massive amounts of money towards new tech ventures. For example, Alphabet Inc. spent US$37 billion on research last year. The continual need for efficiency, improvements and cost savings ensures tech will be a source of strong growth for decades to come.

Of course, a strong stock-market performance by the tech sector has many other variables, but in terms of fundamental growth and new development, we do not think there is much debate. But you might never know it from investor sentiment: with the sector down sharply, many investors are throwing in the towel. Contrarians say they will regret this.

Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

Published

1 week ago

September 6, 2024

Anne Joseph

TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite up more than 150 points, U.S. stock markets also higher

Published

2 weeks ago

August 29, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.

The S&P/TSX composite index was up 171.41 points at 23,298.39.

In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.

The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.

The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.

The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.

This report by The Canadian Press was first published Aug. 29, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Investment

Crypto Market Bloodbath Amid Broader Economic Concerns

Published

1 month ago

August 5, 2024

Harry Miller

The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.

The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.

Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.

The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.

Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.

Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.

Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.

Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.

The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.