Rate cuts and d-day ????????????????

Hi there folks!

"Tractor day" at our local farm/farmshop has become a big deal in our household and that was last weekend - you actually get to sit inside them!! And they are REALLY BIG. Even a combine harvester. Come on that’s cool, you know it is.

I'm up in Edinburgh right now meeting some advisers, as it happens same day as Taylor Swift is kicking off 3 tour dates at Murrayfield stadium. I have interacted with 3 people since I arrived here and can already tell you it is the only thing anyone is talking about. I'm quietly hopeful that I'll be heading the opposite way to the crowds as I leave town later just before the gigs kick off but let's see.

Whiffs of rate cuts are in the air and stocks are up.

The world now has 3, yes THREE $3tn companies. Remember way back when Apple first hit a trillion and it broke everyone's brain how one company could be bigger than the whole UK market? Yeah those were different times. Five years ago. A $3tn company seemed fanciful let alone three of them (and Apple only the third biggest). A good reminder that seeing the future is hard and the market can get to outcomes that seemed really outlandish not long ago.

The Nvidia story is clearly pretty wild though, it hit 2trn way back in Feb of this year, 1.5 in Jan and 1 last summer. You know what else is up just as quick though? Nvidia's earnings and free cash flow. The future growth piece is obviously where the debate rightly is though.

The ECB just cut rates this week as expected (as did the bank of Canada). I'm loving Christine Lagard's use of Linkedin on the announcement here . We are into the rate cutting cycle which is what you might expect with inflation falling but what matters for investors is where rates level off.

Markets have shifted back to expecting more Fed cuts on the merest whiff of a loosening US job market (as we mentioned last time zooming out from the noise the weakening labour market story has been in place for some time). It's not necessarily higher for longer it's "normal for longer" (says Tom Porcelli of PGIM ), it's just finding out what that normal is is the difficult part . Price discovery is still the theme of the bond markets with long term rates moving around in a decently wide range meaning that duration is being poorly rewarded for the amount of volatility it's getting - those short dated bonds are the place to be. More US employment data out later.

In interest rates there have been two vibeshifts since we last spoke, a leg higher in long term rates and the recent fall.

Your global stocks are now up 9-12% for the year, and yes, a lot of that is Nvidia. Emerging markets are behind.

Feel the noise

In this banner year of elections I'm firmly in the "it's mainly noise" camp when it comes to markets (obviously they do matter for all our lives), but three recent examples in EM (South Africa, India and Mexico) seem to have thrown up partly surprising results which have moved markets and probably weighed on EM the last couple weeks. Viewed in the context of three year moves in the respective markets it's probably only the Mexico one that looks truly significant the surprise being there the extent of the majority that Sheinbaum won being enough for deeper constitutional change which the market does not seem to like the idea of. Kudos to the folks at NinetyOne for highlighting exactly these three as high impact ones to watch in a piece a month ago.

Three things I'm reading

1. Concentration, how much is too much? - Michael Mauboussin & Dan Callahan (link )

Every Mauboussin piece is a must read but this really re-iterates a lot of what others have already said about US stock market concentration: yes, it's up from what it's been, but there are historical precedents (1960s) and there are other markets round the world both more and less concentrated so it's hard to pick out a clear message.

The big takeaway

The one thing that really struck me from this report though is the jaw-dropping figure noted on the proportion of economic profits, adjusted for intangibles, that the largest 10 stocks account for. This deserves a whole separate paper to unpack I think but the authors are saying that the top-10 stocks accounted for a whopping 69% of the entire US market's economic profits last year, and 47% over the last 10 years. That's ... a lot. Much much higher than the proportion of accounting profits (about 20% for the Mag7 as quoted in JPM GTM). A lot of this looks to be down to the much higher ROICs earned by the very largest stocks. I had to re-read this multiple times to make sure I'd read this right, someone with more grasp of the specifics of those calculations is going to have to try and explain that one to me...

Honestly I struggle to get too worked up about concentration here (especially when viewed globally not just US) and I tend to feel it's mainly driven by sour grapes from active managers.

2. Rethinking Emerging Markets - Patrick Zweifel and Lola Saugy at Pictet (link )

This rethink of EM is an idea I have a lot of time for. This piece reminds us that EM has outperformed DM since inception of the EM "idea" in the 1980s (tho not by loads), but that average hides some monster cycles with all the outperformance happening pre-2010 and EM having returned very little over the last 20 years.

Conclusion suggests dividing up EM in different ways: China vs the rest; commodity exporters; debtors vs creditors and open vs closed economies.

3. The buyback era Jurien Timmer on Linkedin

Jurrien wonders whether the large decrease in supply of equity stock in the last decade (by circa $21 trillion) is an underappreciated driver of the bull market. On a side note it's interesting that buybacks seem to be becoming a bigger deal in the UK market too now (second chart).

One thing I'm listening to this week:

1. Capital Allocators with Anne-Marie Fink of State of Wisconsin Investment Board. (web | apple )

Really interesting podcast hearing from a large global asset owner, lots of good takeaways. Very interested in this idea of "portfolio engineers" which seems to be a cross between a portfolio analyst and a software engineer.

Grab bag

Anatomy of a Fall (movie) is a recommend.

Citadel and Blackrock are said to be backing a new "CEO-friendly" stock exchange in Texas which I daresay does not sound like something that great for investors. I suspect the NYSE and Nasdaq will continue doing just fine though.

British Land has sold its remaining stake in the Sheffield Meadowhall shopping centre to the Norwegian SWF at a bit of a loss

The deal values Meadowhall at ￡734m, well below the ￡1.07bn British Land paid in 1999 to buy the centre from the original developers, Eddie Healey and Paul Sykes, or the ￡1.4bn valuation when Norges Bank bought the 50% stake in 2012.

D-day tribute -