It's that time of the year where soothsaying is the favorite practice of many analysts who try to predict year end price targets of this or that. I'm going to not do the same. Instead, I'm laying out the investment opportunities I like right now. I can't say where they'll be in 12 months. But I've utilized my typical contrarian approach to the investing landscape to lay out the most interesting opportunities I see at this moment.
- I remain positive on some emerging markets as that is where the bear market has occurred and thus where value still lies. Rather than going broad and saying 'buy EM', I'll hammer down on a few particular favorites:
I still like Brazil even after the great 2016 it had. The country and region are moving to the right of center and its market remains cheap. The Shiller 10 year inflation adjusted P/E (CAPE) multiple is still only 10 times even after a 39 percent rally last year. The U.S. trades at 28 times.
The South Korean stock market is trading at 10 times 2017 earnings and it has basically flat lined for the past 5 years. Corruption was rooted out with the impeachment of its president and the trend to reducing the size and influence of the chaebols (large, conglomerate family-controlled firms characterized by strong ties with government agencies) is rising. Higher returns on equity and managements that care more about shareholders than empire building will be a growing trend that will expand earnings multiples. South Korea recently let Hanjin Shipping, a major container shipping company, go bankrupt, which is a great sign that the bailout mentality is receding.
Notwithstanding the disastrous currency demonetization program in India, the pro business mentality of Narendra Modi still intrigues me and I believe the changes taking place are deep and long lasting. Its market is not as cheap, with a CAPE ratio of 17.5 times but returns on equity are very high for an emerging market at around 14 percent. India has incredible demographics with about 40 percent of its population below the age of 20 years old while 50 percent is aged between 20 and 59. Hopefully Modi can unleash this potential thru economic incentives and a business friendly approach. - This pick of mine is a developed country and is contingent on a certain election outcome in May. Only if Francois Fillon wins, buy France. He would bring a Reagan, Thatcher, and (Trump?) economic revolution to a country that has seen GDP grow by just 1.5 percent on average over the past 25 years. The CAC trades at 14 times earnings with a 3.4 percent dividend yield with a CAPE of 18. It's still 20 percent below its 2007 top and 29 percent below its 2000 record high. Raise your hand if you ever heard anyone tell you to buy France.
- I entered 2016 bullish on industrial metals because of the supply side response to the plunge in prices. Entering 2017, I'm most positive on agriculture as it has lagged badly the rebound in industrial metals and rally off the lows in crude. I like fertilizer stocks in particular.
- Gold stocks were the best performing sub group in the market in 2016 (albeit off a very depressed base) and still everyone hates them. I remain bullish on gold and silver as a contra-play globally to negative nominal and real interest rates, a legacy of massive money printing and firm belief that we are in the last stage of any credibility left for modern day central banking. Bearish on gold because of a strong dollar? The last time the dollar index was at its current level in 2002, gold was trading at $350. Gold trades off real rates and I expect the Fed to continue to drag their feet in raising rates relative to the rate of inflation. Does it make any sense whatsoever that Bitcoin has more than doubled over the past year over worries about fiat currencies and everyone hates gold? I believe this makes zero sense.
- After getting bearish on sovereign bonds in September, I remain so and will state again my belief that the 35-year bull market is over. If I'm right, we face a multi-decade rise if historical cycles are any indication.
- Higher interest rates and a highly overvalued U.S. stock market is rarely a good combination. Expect multiple compressions. All I've seen are EPS estimates higher but not one call for a lower P/E multiple due to higher rates. Stock market sentiment is in rarified air with the latest Investors Intelligence read having bulls at above 60 for the first time in 2 ½ years. The last time that happened was in October 2007. Recall it took 5 ½ years of zero interest rates and three rounds of quantitative easing to help get back to that October 2007 level.
- How much more can be thrown at the euro? Negative interest rates? Check. A central balance sheet that is on its way to doubling from the end of 2014? Check. Political worries that have many questioning the fate of the entire EU experiment? Check. Federal Reserve rate hikes? Check. I'm bullish on the euro. A trade surplus and a central bank that is going to be under major pressure as the year progresses to further slow and eventually end QE. Germany printed a 1.7 percent year over year CPI figure for December yesterday, four tenths more than expected and which is the quickest rate of gain since July 2013. Five year euro inflation expectations have risen 50 basis points over the past three months and is just 10 basis points from the highest level in more than two years.
- Commodity currencies such as the Canadian dollar, Aussie dollar and Brazilian real should rally against the U.S. dollar if my commodity call remains on target.
- Talking strictly about performance and not fees, hedge funds that hedge with a balanced book will rebound in 2017. We are in the second longest bull market of all time and pension funds are cutting exposure to those funds left and right. I guess they want long only exposure instead at this point of the cycle. Great timing I say sarcastically.
