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The trend is your friend

An unavoidable trend for investment commentators at this time of year is to make their forecasts for the coming 12 months, as well as to provide a summary of the past year. According to the Collins English dictionary, the word ‘trend’ can be defined in one of two ways;

  1. A trend is a change or development towards something new or different.
  2. To set a trend means to do something that becomes accepted or fashionable, and a lot of other people copy.

Regular readers of VFTD will know we strive to make our commentaries both thought-provoking and different to the crowd. January editions often create the toughest challenge in this context; however, the definitions above have prompted us to review current trends – particularly those that seem counter intuitive.

Like it or loathe it, social media means most of us are only too familiar with the term ‘what is trending?’ Gaining a real-time and reliable insight into what people are thinking, reading, buying etc., is invaluable information for a whole range of interested parties. Google Trends is a public web facility of Google Inc., which records how often a particular search-term is entered, relative to the total search volume across various regions of the world and in various languages. Using this tool reveals ‘what was trending’ through 2017 and enables us to consider any potential investment consequences.

On a global basis, the top 3 trending Google searches in 2017 were Hurricane Irma, iPhone 8 and iPhone X. The top 3 global news searches were Hurricane Irma, Bitcoin and the Las Vegas shootings. News about hurricanes proved very popular, with Harvey, Jose and Maria joining Irma to occupy 4 of the top 10 through the year. The top 3 trending TV shows were ‘Stranger Things’, ‘13 Reasons Why’ and ‘Big Brother Brazil’.

We think this analysis is interesting and, whilst we accept it is unlikely to move markets going forward, it does help provide an alternative lens as we reflect on 2017. At the sector level, MSCI AC World Technology was the top performer, in USD terms, rising 38.8% on a total returns basis. Facebook, Apple, Amazon, Netflix and Alphabet’s Google (“FAANG”), together with Baidu, Alibaba and Tencent (“BAT”, the 3 largest Chinese internet stocks) grew by a combined US$1.5 trillion, over the 12 months. This is the equivalent of Germany’s total equity market capitalisation, the fourth largest economy in the world. The iPhone story is, of course, well known, but – for those less familiar – both ‘Stranger Things’ and ‘13 Reasons Why’ are Netflix Original productions, going some way to explain why the company is an investor favourite. Moving away from technology – or are we? – the search volume around Bitcoin is unsurprising, but the trend regarding hurricanes requires further reflection. Is it a result of a growing interest in the environment and climate change, or simply humankind’s fascination with the weather? (Or perhaps the latter is just a British thing?!)

Staying with the UK, the top 3 trending searches were Meghan Markle, iPhone 8 and Hurricane Irma. The top ‘what is’ trending data for 2017 is a bit more interesting and would seem to highlight a more politically engaged, if not informed, nation. ‘What is a hung parliament?’; ‘What is an exit poll?’; ‘What is a General Election?(!)’; joined ‘What is the DUP?’ in the top 10. Politics, in the form of Brexit, will - no doubt - continue to impact the value of UK and European assets through 2018.

Looking further afield, the top 3 searches in Singapore were SgPokemap (Nintendo), iPhone 8 and iPhone X, further highlighting the tech theme. The top 2 ‘what is?’ trends in India were ‘What is GST?’ and ‘What is Bitcoin?’ Prime Minister Modi faces a General Election in 2019 and policy decisions in this increasingly significant economy will have implications for many over the coming year.

Which trends appear odd, or counterintuitive?

Moving away from the insights provided by Google and focusing solely on economic and financial data, we believe the following trends should make all investors pause to think*;

  • In this ninth year of economic expansion, global stock market capitalisation continues to grow, climbing US$15.5 trillion in 2017, to US$85.6 trillion – a record 113% of GDP. Does this suggest overvaluation?
  • Global debt rose to US$226 trillion in 2017 – a scary 324% of global GDP. Surely this, in an age of austerity, seems surprising?
  • Argentina (a country which has defaulted 8 times in the past 200 years) issued a 100-year bond. Is this prudent lending?
  • The yield on European high yield bonds fell below the yield of US Treasuries. Credit investing logic turned on its head?
  • S&P 500 volatility sank to a 50 year low. Surely at odds with the index making 62 record highs through the year?
  • The S&P 500 rose 21.8% in 2017, with a positive return in every month; the first time this has ever happened in 90 years of data. Does this seem appropriate for an economy with a generational low in productivity growth? - 7,855 ETFs accounted for 70% of global daily equity volume last year. There are now more ETFs than listed companies in the US. Has the pendulum swung too far towards passive investing? What does this mean for asset prices if this trend were to reverse?
  • Bitcoin soared from US$952 at the beginning of 2017, to close the year at US14,311. Does the extraordinary rise in cryptocurrencies present a systemic risk to financial markets?

*Source; Gluskin Sheff Research; BMO Global Asset Management; Deutsche Bank AG

Implications for portfolios

The economist Anatole Kaletsky, in a recent article published by Gavekal Research, argues the most important questions facing investors, at the beginning of 2018, are the same as they were 12 months ago. Why? Because he believes ‘the global economy is in the middle of a long term economic expansion and structural bull market.’ In these circumstances, he states ‘trend following is the best investment strategy in the middle of a trend.’

On this basis, many of the trends we have described earlier – no matter how long in the tooth, or as exaggerated as they may appear – could well continue for a while yet. This said, we feel confident that we are closer to the end, than the beginning, of this cycle. Signposts like record levels of employment, tight credit spreads, ultra low volatility, and a flattening yield curve warrant us being cautious with our investor’s money. Although there may be little cause for imminent concern, we need to be vigilant given the unwinding of QE, expectations of rate rises and the potential for inflation to accelerate. We can’t help but be reminded that when most forecasts and experts agree, something else is likely to happen. Or to quote, in full, the renowned “Market Wizard”** - Ed Seykota (1995) – “The trend is your friend except at the end when it bends.”

**Market Wizards is a book written by Jack D. Schwager and published in 1989 in which he interviews a wide range of traders with excellent track records of profitability

Julia Warrander and Russell Waite

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