The waiting game

The Weekender offers my perspective on market developments and their potential broader implications, written most Friday afternoons. If you'd like this delivered to your inbox on Saturday mornings via Northern Trust, please sign up here.

Delayed gratification

Jonathan Haidt in The Anxious Generation suggests one of the outcomes of replacing play-based childhoods (think cricket in the park with mates) with ‘phone-based’ ones is that children are growing up to not only become less social (see The Lonely Century) but also more impatient, with less ability to concentrate (attention deficit) and are increasingly being ‘re-wired’ to seek more instant gratification. This of course is not just an issue for kids. Adults too are suffering. In the UK there’s been a fifty-fold increase in ADHD prescriptions in men between the ages of 18-29?from 2000 to 2018.

Let that sink in…before you move on.

I’m stretching here (of course), but might this need for instant gratification partly explain why everyone seems so bearish on China? Namely, their plan lacks immediacy, a ‘big number’, and a visible liquidity boost we can all make comparisons to and against? Might China be taking a different, more gradual, and incremental approach to drive fundamental change in behavior and incentives? And if so, may this perceived ability – to delay gratification – be linked to how they restrict child access to the internet? The Government also promotes daily outdoor physical activity and team sports via its Healthy China 2030 initiative.

What was I saying...? Oh yes, Finland. Nope, that was some weeks back…

When words speak louder

...Oh yes, China and the lack of a big number. Analysts need data to divine inflections, trends and make predictions of the future. But data, certainly as it relates to China, is often a little unreliable. What’s more, the qualitative signals of a command economy are sometimes more relevant than the quantitative, at least at inflections, making the job of analysis trickier still. In other words, a focus on the quantitative may for now, miss the bigger picture emerging from qualitative signals, which taken together with a dose of Kaizen/marginal gain theory thrown in, suggests significant support for key areas of wealth transmission, namely property and stocks. And should the collateral embedded in these assets start to rise, so too could confidence, potentially unlocking some of those record savings sitting in term deposits earning less and less (as rates fall). I seem to remember a similar argument applied to another country during their property crisis.

But I forgot who. See above: attention deficit.?

Demand and migration

Cheaper loans, subsidies and inventory management aside, property demand should rise with urban hukou reforms which aim to give 200m or so migrant workers the necessary permissions to own property. While at the same time supporting local governments to promote urbanization by tying fiscal transfers to urbanization plans and encourage migrants to purchase unsold inventory to remove the overhang. While this sounds simple, you can expect resistance in some of the major centers. For the issue that many countries face with immigration, China faces too.

That said, I doubt we will see a wall or forced deportation. But we might see more housing demand. Meaning the way China deals with this issue could be a defining moment in their economic history. Surprise us on that and they might surprise us on the economy (and on demand for commodities) too.

Stocks as policy lever

Stocks have their own story. And it’s here you might find more instant gratification. As you know, stocks seldom correlate to GDP growth and tend to be driven as much by narratives, as numbers. That said, numbers still matter, especially those related to incentives and supply. Linking market value to corporate KPIs for example, is an important signal. So too is the availability of cheap loans to buy back stock, lower supply, increase value, compound dividends and be paid in carry assuming dividend > interest expense.

And if looking for evidence this policy is working, consider this data point in the FT: Chinese buy-backs have just hit a record high. Could this be another case of: ‘if you don’t buy them, they will buy them themselves?’

Higher values

All this focus on lifting book value reminds me of the Japanese, and in particular the TSE’s attempt to have firms publish plans to lift their BV above 1x. You might remember back at the start of last year we highlighted the huge number of shares trading below 1x BV at the time, and ETFs like the ‘Low PB/Cash Rich ETF (MSAPJPBL)’ as expressions thereof. Similar logic may now apply to China where some 800 or so currently trade below BV according to Trivium China.

If anyone sees an ETF to capture that theme, please sing out...

Goldman vs The Economist

If, like me, you prefer to move more slowly and take a longer-term view, then I urge you to not read the latest Goldman Sachs strategy report. For if you do, they will – with compelling logic – persuade you the period of exceptional returns is over, and that US equities will average just 3% over the coming decade. Less even, than treasuries. Instead, you might prefer the counter, and more consensus view from The Economist, whose Special Report on the American economy starts with the statement that it is: “The Envy of the World”. In the article, “Why the American Stock Market Reigns Supreme,” it explains that America’s high valuation multiples “are justified” and, while forward returns may be lower, are expected to remain “world-beating.” Phew! In fact, if you – or any of your friends at Goldman’s – would like to bet against America “The Economist will gladly take the other side of the wager.” It even explains why investors should continue to avoid Chinese stocks, clearly preaching to the converted!

Now, I’m not contrarian by nature but there is something about this blind level of conviction, which worries me. If little else, it’s got me thinking more about boosting allocations to those dividend compounders in other parts of the world. I may have to wait for values to appreciate, but at least I’m paid to do so – in cash-covered yields higher than 5%, with growth and buybacks to come.

Multipolar world, multipolar allocations. And gold

A fragmenting political world stands at odds with a concentrated economic one. Over time I expect value will rebalance in favour of other markets. That view has not paid off this year (although over two years the German Dax has outperformed the S&P, which is decent for the ‘sick man of Europe’). But what has worked better is gold. It’s up more than 30%, even more than the Nasdaq. While equities seem blissfully ignorant of the current fragmentation in global politics, gold has seemingly been paying far closer attention.? As Luke Gromen suggested recently, sanctioning Russian FX reserves may one day be considered as big a deal as when Nixon closed the gold window in August 1971, “…and told the world to buy gold."

BRICS

Perhaps the most visible expression of this comes from last week’s BRICS summit in, err, Russia. Brazil’s President, da Silva seemed quite animated when suggesting the Bretton Woods institutions are failing, and that we need new structures, “so that the multipolar order we aim for is reflected in the international financial system”. Now, if gold features in this new system, which most suspect it will, then demand may continue to rise. As Gromen (again) suggests, ‘at $2700/oz, the market value of US official gold = 8% of foreign held USTs. Prior to 1989 (before the US's unipolar moment), that % was never <20%; the LT average was ~40%. In other words: ‘moving away from US unipolarity implies gold up 3-5x for here.’

Perhaps that’s a stretch, but as Gold is yet to make front cover of the Economist recently and given how few allocators I know allocate to the stuff (despite saying their greatest tail risks are inflation and geopolitics), I suspect there’s a bit more life in the old dog left.

Biggest signal yet

BRICS summit aside, there were other signals of de-coupling. Take HSBC’s announcement they were splitting their bank into East and West, a move Bloomberg suggested is not just about cost. Germany still has land borders in place, so movement is not exactly ‘free’ and many Europeans’ I’ve spoken to are worried about a Trump presidency not so much for what it means for NATO or tariffs (which are legitimate concerns of course) but what it means for European unity itself. Perhaps the biggest signal however comes from Italy, and from the town called Monfalcone. For it’s here where they recently banned the game of cricket!

And yet, ironically, and despite all this, the country who invented the sport – England – is actually trying to get a little closer to Europe. So close in fact they’ve appointed a German to coach their national football team. “Fu?ball kommt nach Hause.”

In other news...??

My hopes of having a City-friendly UK Prime Minister have been dashed after he branded me and my kind as ‘non-workers’ (for many of us are paid in stock).

The FT highlighted that fees on buy-out funds have fallen to ‘record levels’, although public equity managers may not be getting the violins out just yet, for they still take 1.74%!

England lost out in another sporting competition that it invented, The America’s Cup - to my home nation of New Zealand (NZ also won the ICC T2O competition in Dubai, just saying). Trump Media (DJT) is up 50% (at time of writing) in two weeks, signaling the market’s expectation that Trump will reclaim the Presidency (DJT being a meme stock on election outcomes, little more).

Tesla crushed the shorts, rallying 25% since reporting Q3 earnings (see above: numbers and narratives).

And yes, we have a UK Government Budget this week. And no, I haven’t yet moved to Milan.?Yet.

NEITHER THE INFORMATION NOR ANY VIEWS EXPRESSED CONSTITUTES INVESTMENT ADVICE AND IT DOES NOT TAKE INTO ACCOUNT THE SPECIFIC INVESTMENT OBJECTIVES, FINANCIAL SITUATION AND THE PARTICULAR NEEDS OF ANY SPECIFIC PERSON WHO MAY VIEW THIS MATERIAL.

These are my own personal views, not those of my employer. This report is not intended for retail customers. Any further disclosure, use, distribution, dissemination or copying of this report or any of the information herein is strictly prohibited. The information in this report has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any opinions expressed herein are subject to change at any time without notice. Any person relying upon information in this report shall be solely responsible for the consequences of such reliance. This report is provided for informational purposes only and does not constitute legal, tax or other advice nor does it constitute an offer or solicitation to purchase or sell any security, commodity, currency or other product. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining advice from their own advisors. Internet communications are susceptible to alteration and Northern Trust shall not be liable for the message if it has been altered, changed or falsified.

Under no circumstances should you rely upon this information as a substitute for obtaining specific legal or tax advice from your own professional legal or tax advisors. Information is subject to change based on market or other conditions and is not intended to influence your investment decisions.

? 2024 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For legal and regulatory information about individual market offices, visit northerntrust.com/terms-and-conditions.

?