We advocate reducing popular positions where prices have moved beyond fundamentals (examples are gilts and bond-proxies such as utility stocks). We also would resist taking contrarian positions in sectors facing big structural challenges (e.g., European banks).
Market Realist – Some positions have moved beyond fundamentals
Popular investments not supported by fundamentals and that have rallied sharply over the past few months look risky. As we discussed in the previous article, government bonds issued by developed markets and bond proxies belong in this category.
A bond proxy is an investment that provides higher and more stable yields with lower risk. The telecom (IYZ) and utilities (IDU) sectors are normally considered bond proxies. The S&P Telecom Select Industry Index TR is up by 15.8% YTD while the S&P 500 Utilities Index TR is up by 16.6%.
However, past performance doesn’t guarantee consistent future performance unless it is backed by strong financials and the ability to generate higher cash flows. Both of these sectors haven’t shown any robust improvement in growth.
Very low to negative interest rates, huge bad loans, some banks falling short of stress tests, and tough EU bail-in laws have all affected European banks this year. While banks in Italy are on the verge of crisis, other banks in the region are not far behind. Hence, investors need to be cautious when taking exposure to European banks (EUFN).
On August 30, 2016, Fitch Ratings, one of the top credit-rating agencies, maintained an overall rating of "stable" for PPG Industries (PPG).
Last week, Donald Trump blacklisted Chinese telecom giant Huawei Technologies amid rising US-China trade tensions.
This year has been a great one for Snapchat parent Snap (SNAP), and its stock has nearly doubled.
Coca-Cola (KO) will offer a limited edition of its of New Coke cans beginning May 23 as part of its partnership with Netflix’s (NFLX) show Stranger Things.
Clorox stock (CLX) is down about 8% since the company posted its third quarter of fiscal 2019 earnings on May 1.
JD.com (JD) recently invested ~$55 million in purchase a ~10% stake in Jiangsu Xinning Modern Logistics, a Chinese logistics company focusing on the consumer electronics supply chain.
Today, the US stock market was on a path of recovery after starting the week on a bearish note yesterday.