From Warren Buffett
Ignore politics and macroeconomics when picking stocks.
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.
“But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.
I review the various stock markets weekly. Many investors may be pleasantly surprised that the Ukraine - Russian crisis did not result in war. I was not surprised. Many Russian Oligarchs park their money in London, Geneva and New York. They open private banking accounts, stash their money away in secret funds. They also buy trophy homes in London and New York. I'm sure the Oligarchs actually have a lot of say over Kremlin, and Putin is merely someone who helps them execute. Imagine if Russia invades Ukraine and move west. It would bring down property prices in London and New York due to the threat of war. Stock markets worldwide would plunge and the Oligarchs would see their wealth decimated. Putin's retirement plans would be in jeopardy.
Back to the stock markets. The cheapest markets now are:
1. Asian banks
2. HSCEI (China)
3. Russia
4. Japan
5. Global banks
6. Mining
7. Euro banks
8. Technology
9. Global stocks.
Most expensive markets that we should be wary off are:
1. Philippines
2. Euro real estate
3. American home builders
4. Indonesia
5. Thailand
6. Singapore.
However, as I mentioned in earlier posts, valuations are not everything. Earnings growth and monetary policy are equally important. If I combine all factors, the results are:
Those that I would buy are:
1. Global Tech. (cyclical) cheap valuation + good macros.
2. Euro banks (cyclical) cheap valuation + even better macros.
3. US banks (cyclical)... dollar cost.... from (3) downwards, not strong buys. same as (2).
4. Mining (cyclical) cheap valuations, not so strong macros.
5. Global banks (cyclical) cheap valuations, not so strong macros.
6. US stocks. not so cheap valuations. but good earnings growth and abundant liquidity.
Those that I would SELL are:
1. Europe. This is a big surprise. Valuations are not cheap. earnings are weak and liquidity is so-so. I would wait for a few more weeks before reacting. I suspect European coy's earnings will rise in 2H2014.
2. India. yield curve is inverted. earnings growth is weak.
3. Thailand. Valuations expensive. Earnings growth and liquidity poor.
4. Indonesia. Same as Thailand.
Conclusion:
1. Cyclicals are generally prime for a recovery.
2. General stock markets are not cheap.
3. Mining sector is making a recovery.
4. Tech and banking sectors are also making a comeback.
5. Liquidity is poor in Asia / EM due to inflation, rising interest rates. Earnings have disappointed too.
6. Europe's earnings may improve in 2H 2014.
7. It is still a sideways, trading market. reasons are still not compelling.
