Last week in Switzer Daily I did a piece on our screwy stock market that doesn’t want to join the bull market rally to the same extent as the Yanks, the Europeans, the Japanese and many of the other Asian markets.
The story motivated one of the Switzer Report subscribers, Chris, to send me an email for a point of clarification, which a lot of you might also be wondering about, so I decided to tackle the issue in today’s Switzer Report.
What I said was summed up with the following:
“If I’m right in 2018, you could make 16% on investing in the index, and, if you add in say 4% for dividends, then by buying an ETF — exchange traded fund — for the best 200 stocks in Australia, you could make 20%!”
This was based on the pretext, which I’ve already shared with subscribers, that I think 7000 on the S&P/ASX 200 Index is not out of the question this year.
I also explained that:
“I’m interested in this analysis because my listed ETF — the Switzer Dividend Growth Fund — basically tracks the index in question, but we tend to have a bigger dividend because we chase dividends.
(The index ETF should do better on capital gains but we should be stronger on the dividend payoff.)
I also explained that:
“I’ve got an ETF for the Index and SWTZ in my core holdings because I’m not a thrill-seeking stock market player. I keep a little aside for more exciting plays to add a bit of alpha to my returns.”
My subscriber, who happened to be a fellow alumnus of UNSW from the same time I was there as a student, has a similar attitude to his core holdings but he had a question I think is relevant to many investors seeking some extra alpha.
Global exposure
He asked me what I’d do for overseas exposure, given the Australian stock market is about 2.5% of the world’s.
I must admit, I use overseas investments for my alpha and, in recent years, this has been the right play.
My preference has been IEU (iShares S&P Europe) as this ETF captures the European market. It was so beaten up post-GFC that it was a bit of a contrarian play but remember, this is not a core play so it’s where I accept a bit of risk.
In early 2013 IEU was around $39 and is now $61.82, so it has delivered.
Not surprisingly, the equivalent S&P 500 ETF — IVV — has performed even better and anyone who combined both ETFs since 2013 has just about doubled their initial outlays.
My subscriber wondered whether IOO (iShares S&P Global) for the top 100 overseas companies would’ve been my preference and I could have gone for this option but it did not do as well as the S&P 500 ETF plus IEU. However it still did well over the past five years, rising from $67 to $97 over that time.
But that was then, what about now?
My subscriber rightly points out that “some pundits are saying that the US market is grossly overpriced and they wouldn’t touch the S&P500 (IVV or IHVV) and would strategically limit themselves to, say Europe (IEU) or emerging markets (IEM).”
It’s funny but I wouldn’t be surprised if the Europe plus S&P 500 combined ETF has at least another good year left and that’s based on the fact that these Trump tax cuts could really do a lot of good to companies’ predictions about their bottom lines.
Meanwhile I do believe Europe is still in a sweet spot for investing.
And my willingness to stick with the S&P 500 was reinforced by this wild forecast from US-based, Tom Lee, head of research at Fundstrat Global Advisors who told CNBC that US stocks are likely to run higher for the next 11 years!
This even shocks an optimist like yours truly.
“Both Fundstrat technical strategist Rob Sluymer and I think it’s more like 2029 is the peak of this equity market cycle and then the S&P is 6000 to 15,000,” said Lee on CNBC last week.
“We’ve had so much caution since ’09 that animal spirits have been depressed,” Lee said.
“Last year, 2017, was probably the first time in nine years that I thought institutions were actually bullish,” Lee said, adding that he doesn’t particularly find any Fundstrat institutional clients that optimistic on stocks right now since they did so well last year.
On that basis, IVV should have a ‘few more’ legs up but I have to say I reckon around March, the US market could get that overdue pullback/correction before resuming its march higher.
Watch the cycle
April to May and even extending to October can be quite a vulnerable time for stocks — see my chart below for proof:
And adding in the Trump factor, you have to wonder for how long Donald can send stocks higher. The Yanks are funny types with political controversy seemingly good for stocks. The weird chart below shows that Trump’s mad, and seemingly dangerous tweeting, has created the kind of political partisanship that actually helps the stock market but you have to wonder how long the President can keep exciting stock players.
Below is how some market participants see Trump’s work.
“A president can create an environment that is business friendly and talk about it. What we saw was he talked about it and it did come to fruition,” said Quincy Krosby, chief market strategist at Prudential Financial. “The president has been explicitly clear about what he wanted to achieve: deregulation, tax cuts and an environment that is friendly to business. That is a key ingredient for markets.”
What to do
I definitely believe in the European and US stock market stories for 2018 and 2019 but 11 years seems unbelievable! I think a correction will come, but on the 11 years forecasters views’, it would have to be a buying opportunity.
I like IEU, IVV and something like the Contango Global Fund (CQG) run by the WCM team out of Laguna Beach, California and, say, the Magellan Global Equities Fund (MGE). You could also invest in something like the Platinum Asia Fund or PAF, which could give someone a pretty good fund of funds approach to getting overseas exposure.
Remember, my overseas plays are in search of alpha and so I don’t have the same confidence that I have for my safe, yet less spectacular, local plays.
Mind you, because we have underperformed I think betting on a local better-than-expected showing for stocks over the next couple of years could be a good contrarian play. If I’m wrong, you still will be holding damn good assets for the future.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
