5 current investing themes and what the opposite trade looks like

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.)