On Friday, President Trump hailed the receipt of a "very beautiful" letter from North Korean premier Kim Jong Un. Why is this important?
It probably isn't to the vast majority of the world’s population but the investment community has got into the habit of hanging on every Trump word. And for good reason. This month already, one tweet from this one man about $30bn of yet-to-be introduced China trade tariffs has wiped $7 trillion in value from global equities. Again whatever the outcome of Trump's entertaining style of deal making (which typically starts at the extreme and progressively moderates), most of this is likely just noise. Nonetheless despite global interest rate cuts and record employment in the world’s largest economy, investor sentiment is said to be the gloomiest it has been since December 2018 (which was a great buying opportunity) and a flight from equities has pushed supposed "safe haven" assets such as bonds and gold to recent highs.
At Ravenscroft, we prefer to base our investment decisions on underlying fundamentals, taking account of irrefutable long term trends and using bottom up fundamental analysis to select when best to buy any investment.
If most of the world has become cheaper as a result of one tweet, most of the investment universe is becoming more attractive to buy. It follows that we should spend more time analysing potential investments than analysing Trump's tweets. Many factors and news headlines impact a share price's short term performance, but not many of these actually influence the underlying business and its ability to generate future returns; in other words, a lot of ugly noise needs to be ignored!
Predicting returns from bonds is slightly easier, those investors buying 100 year Austrian 2.1% bonds know they will lose 50% of their capital, or 100% if Austria defaults (unlikely). In return for this risk, investors receive 1% per annum income (0.8% YTM). Austrian inflation is close to 2% so this investment would actually lose near 1% per annum in real terms and at least half your capital over a longer period. A guaranteed capital loss and negative real income..... what a beauty!
Valuing an equity is more of an art than a science, and beauty will often come into it. In polarised and volatile markets, investors feel more comfortable in investments where the outlook appears most rosy.
Everyone can see that Netflix will add more subscribers and Beyond Meat will sell more meat substitute but what price do you pay? In Beyond Meat's case, investors were recently paying up to $15bn for a loss making company with $86m of reported revenues. For just $10bn more, one could buy Britain's most successful retailer Tesco, who are also the world’s largest online food retailer (that’s beautiful right?!). Tesco has £64bn of revenues, almost a fifth of total retail spending in the world’s fifth largest economy. It also has £20bn of fixed assets, its profits are growing and it has already proven itself by generating tens of billions of pounds of profit for shareholders over many years in a highly competitive market. *
Big and boring may not be beautiful but it is probably a much safer place to be.
Have a good week!
*Figures from Factset
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