2017 Investing – Food For Thought

Yesterday I detailed potential bullish and bearish events that could shape markets in 2017. Today I want to go over some investment ideas that are on my mind for the New Year. As I can’t mention individual stocks, I’ll have to get macro with my investment ideas that reflect my typical contrarian approach.

1. I remain positive on some emerging markets as that is where the bear market has occurred and thus where values still lie. 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. It’s Shiller 10 yr inflation adjusted P/E CAPE multiple is still only 10x even after a 39% rally last year. The US trades at 28x.
2. The South Korean stock market is trading 10x 2017 earnings and its stock market 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 chaebol’s is rising. In fact, South Korea let one of them, Hanjin Shipping go bankrupt. A major sign that the bailout mentality is receding.
3. 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. It’s market is not as cheap, with a CAPE ratio of 17.5x but returns on equity are very high for an emerging market at around 14%.
4. 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% on average over the past 25 years. The CAC trades at 14x earnings with a 3.4% dividend yield with a CAPE of 18. It’s still 20% below its 2007 top and 29% below its 2000 record high. Raise your hand if you ever heard anyone tell you to buy France.
5. While I’m still bullish on commodities, I’m most positive on agriculture as its lagged badly the rebound in industrial metals and rally off the lows in crude. I like fertilizer stocks in particular.
6. 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? Makes zero sense.
7. 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 (my readers have seen my multitude of reasons). If I’m right, we face a multi decade rise if historical cycles are any indication.
8. Higher interest rates and a very overvalued US stock market is rarely a good combination. Expect multiple compression. 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 and in October 2007 before then. Recall it took 5 ½ years of zero interest rates and 3 rounds of QE to help get back to that October 2007 level.
9. 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 has many questioning the fate of the entire EU experiment? 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% y/o/y CPI figure for December yesterday, 4 tenths more than expected and which is the quickest rate of gain since July 2013. 5 yr 5 yr euro inflation expectations have risen 50 bps over the past 3 months and is just 10 bps from the highest level in more than 2 years.
10. Commodity currencies such as the Canadian $, Aussie $ and Brazilian Real rally against the US dollar if my commodity call remains on target.
11. Talking strictly about performance and not fee’s, hedge funds that hedge with a balanced book rebound in 2017. We are in the 2^nd longest bull market of all time and pension funds are cutting exposure left and right and I guess want long only exposure instead at this point of the cycle. Great timing I say sarcastically.