2023 came and past. There was no recession, the Russian-Ukraine war continued and more conflict happened in other parts of the world. Israel-Hamas. We may have Trump as the most powerful man on the planet facing off three dictators: Putin, Xi and Kim. How fun.
Meanwhile stock markets continue to make new highs (except China). The Nikkei broke past its peak of 39,000, last achieved in 1989. This was the year Taylor Swift, the first billionaire singer who helped Singapore gain more hatred from our neighbours, was born. At 35, her age is also slightly higher than the median and average age of all the humans on planet Earth.
My point, is that it's been a while since Japan was on investors' mind and just when Nikkei tried to come back, India took centre-stage limelight again with Modi promising more and the India stock market hit all time high as well. Yeah, the world is crazy.
So what should we expect for the rest of 2024 and 2025?
I believe what goes up must come down. Valuations are stretched but not crazy. The last time Nikkei hit 39,000, it was trading at 60x PE. Today it's 16x. The PE for the US market is expensive but not at its most expensive when we look at its history, as exemplified by the famous Case-Shiller PE ratio chart below.
The last bubble was with the Nasdaq and it is worth examining at that as well. The Nasdaq was trading at >100x PE back in 2000. While it has way surpassed that peak of c.5,000 at >17,000 today, the PE ratio is c.30x. So, just looking at PE valuations, we can always argue, things are not super crazy. But every bubble is different. It can go way higher and break the previous PE record high.
This could be generative A.I. sucking in even more money which means the Magnificent Seven (Nvidia, Alphabet/Google, Meta / Facebook, Tesla, Amazon, Microsoft and Apple), the GRANOLAS in Europe (GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, Loreal, LVMH, AstraZeneca, SAP and Sanofi) and the Seven Samurais (Tokyo Electron, Mitsubishi Corp, Toyota, Nintendo, Fast Retailing, Sony and MUFG) continue to go up. While the rest of the market stagnates.
Or things can just collapse should the weakest link break. It could be another Silicon Valley Bank, it could be China, or Tesla. The risks are not being highlighted today but with interest rates this high, by right, investors should be favoring stocks with lower PE or higher earnings yield. Yet, we are seeing the opposite.
As fundamental investors, we always have to be mindful of valuations. I would advocate we look at the specific companies closely and make sure valuations are cheap. We should also keep comparing earnings yield to T bills. If we can get 3-5% on T bills, we must think hard about buying stocks at less than 3% earnings yield or 33x PE. Singapore 6 month T bills are still giving 3.7% and US ones are even higher at 4-5%.
As to fundamental analysis, I believe A.I. will change the game. It is still unclear how. One scenario might be that retail investors might be better served, since we can simply ask chatGPT to do the analysis in the near future. Or it might also be the case that no one beats the market anymore. So we just buy the index which is generating return by A.I. investing for us.
Before that future happens though, we have Substack today (mine is 8percentpa.substack.com). I believe Substack is becoming an important growing eco-system for independent writers who could write as well as professional analysts perhaps with the help of chatGPT. Their analysis are in-depth, informative and much better than Youtube videos (e.g. Roaring Kitty). The following would be a list of posts on both new names and names that I follow.
Just a few posts from other Substacks:
https://eaglepointcapital.substack.com/p/verisign-a-capital-light-compounder
https://buybackcapital.substack.com/p/the-issue-no-4-vrsn
https://hightechinvesting.substack.com/p/warner-bros-discovery-stock-catching
https://pricepoint.substack.com/p/price-point-040-lets-take-a-look
https://theartofhittingbombs.substack.com/p/company-deep-dive-no-5-adobe
https://cloud.substack.com/p/the-5-ways-ai-will-transform-creativity
Huat Ah!
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