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The FANGS freight train

It is with heavy heart that I share with you my view on markets. It is my opinion that we are on the verge of one of the greatest tests to asset valuation theory in history. To summarise the markets as I see it, we have unprecedented levels of stimulus, budget deficits widening at a record pace and size and meanwhile we have an aggressive V-shaped (bounce/recovery) in asset prices following the market low in March.
It is with heavy heart that I share with you my view on markets. It is my opinion that we are on the verge of one of the greatest tests to asset valuation theory in history. To summarise the markets as I see it, we have unprecedented levels of stimulus, budget deficits widening at a record pace and size and meanwhile we have an aggressive V-shaped (bounce/recovery) in asset prices following the market low in March. Many respected commentators have described the current economic situation as the biggest economic crisis since WW2, maybe longer and asset prices are going crazy. The rebound in equities and the disconnect from main street is unprecedented as is the aggressive rebound in house prices, given the historically high levels of unemployment. Gold has not yet seen the price action that most would expect given the spike in volatility and risk of both currency and asset devaluation. However, many would argue that gold is only just beginning to perform even in the context of the last major market correction in 07/08. The most obvious indicator has been the surge in inflows into Gold ETFs with a preeminent ETF provider, Sprott Asset Management, reporting an 83% increase in AUM YTD since 31 Dec 19 and a 35% ($2.2bn) inflow to their gold bullion ETF. Warren Buffet’s entry into the gold sector has also been noteworthy, given that Berkshire sold out of US Banks (Goldman Sachs) and has taken a substantial position in Barrick Gold. Historically his thesis has been that gold is not a productive asset, as it has no intrinsic value besides the belief that others will desire it even more avidly in the future, i.e. being pleasing to the eye and offering a level of emotional comfort in a shiny metal that is steeped in tradition. The trade now seems to be focussed on the cash flow generating capacity of Barrick Gold. Gold pundits like to advertise the idea that if 1% of Global AUM moved into physical gold, the price would theoretically be in the US$5-$10k range!!! The question needs to be asked: what if the most impaired industries such as major airlines, hotels, and hospitality delisted tomorrow? Would their disappearance be negligible to equity markets seeing as they now count for such a small part of the index compared to the FANGS? The weighting of the large mkt-cap tech stocks within the US equity indices is becoming more and more relevant to the overall direction of the entire equity mkt. This brings us to a reality that the market has been slow to accept, that the concentration in tech names like the FANGS have been and will continue to drive US index performance. It seems other industries are becoming less and less relevant and in particular, the S&P 500. As these companies continue to dominate, innovate and deliver astronomical investor returns via share splits, the gravitational pull seems too hard to fight. With the FANGS current share prices being as high as they currently are, share splits are inevitable in the near term. This would only increase the attractiveness of these companies and the FANGS “freight train” would continue to pick up speed and you know what they say about freight trains!!!???? Don’t stand in front of them. The below graph by Yardeni Research Inc in a study published on April 24, 2020, gives a great analysis of the relationship between FANG (Facebook, Amazon, Netflix, and Google/Alphabet) and the US S&P 500 index. If you’re expecting volatility in your portfolio now could be a compelling time to hedge. For the last 12 months, we’ve offered a range of investments designed to benefit from market volatility (Dispersion and Gold) and may open up similar investments in the future.  Click here to see what we are offering at the moment.   Reach Markets are the advisors assisting with the management of this offer and may receive fees depending on whether an offer is taken up by investors. Past performance is not a reliable indicator of future performance.   Sources:

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