SHOT VIEW: Efficient markets? No, short-sighted!

January 7, 2020

Indifferent financial markets, apathetic with respect to events that will enter the history books.

Donald Trump’s supporters' assault on the democratic institutions of the United States did not prevent Wall Street from breaking new records.

Something extremely serious happened yesterday in America. An attack on democracy in the country that has represented it in the last century. The financial markets have not reacted to this situation, indeed reaching new highs.

The lack of interest on the part of the markets in relation to events shows how distant they are today from reality. This is perhaps more serious than what happened. American indices are at an all-time high in what is the worst economic and social context since the two world wars. The drug of monetary injections is working very well, perhaps too well.

We have already seen markets that do not look to sustainable fundamentals but only to a potential growth that is often absolutely unjustified, and we have already seen what they have led to. Many attribute to the financial markets a forward-looking and anticipating power over what will happen. In reality, the markets are very short-sighted, a short-sightedness dictated by greed and perhaps not conscious.

Many justify high market valuations by the fact that markets look beyond, but beyond what? Markets have a view blurred by greed, central bank liquidity and low interest rates. If they are really able to look ahead, they should realize that, if the manoeuvres of states and central banks really work, we will find ourselves with an inflation that will start to grow, and the central banks will have to take away liquidity and raise rates to control it. Failing the drivers who have and will have raised prices so much we will see the balloon deflate very quickly.

We are not pessimists, we simply analyze with rationality what is happening. Some indices, sectors and stocks are clearly overvalued, while others are widely undervalued. This shows once again how little the markets are able to look to the future with lucidity.

Some examples.

In the tech sector, many stocks have absurd multiples that cannot be justified even in the rosiest expectations. See Tesla, which over the years can only lose competitiveness and technological gap. When the market realizes this, it will be painful.

The markets also underestimate the impacts that legislators will have on the sector in the coming years in terms of antitrust, regulation and taxation. It is true that these companies have benefited from an outdated regulation, slow to react to change, but the future holds bad surprises for them.

Furthermore, there is an excessive expectation of change regarding the use of technologies. As a result of the pandemic, we believe the world will be different than before, but not that much. Lockdowns forced us to use more technology but also made us realize how nice it is to go shopping at the supermarket or try a dress in a store. To think that from tomorrow we will all remain at home, ordering everything via the internet is pure utopia and not understanding how much man needs to be social. For us, therefore, the tech sector is generally overvalued.

The energy sector, on the contrary, has suffered greatly from the pandemic and is still far below the February levels. This is mainly due to the green energy boost. If the energy transition comes, it will pass through those companies that today have the market in their hands. In any case, this cannot happen in such a short time as many people believe. To understand this, it is enough to read the financial statements of the most important energy companies. They are investing a lot with significant targets at 30 years that will perhaps become 20 or 15, but certainly not in the short term. In our opinion, oil will see its price rise a lot in the near future. Our view is that the sector is currently undervalued.

We could go on for hours, but it would get boring. We reiterate our regret at seeing a finance only able to show its muscles to obtain liquidity from central banks. A junkie finance that behaves like a drug addict in perpetual abstinence, that lacks professionalism and merely follows the waves of the moment without objective evaluations. A sadly disinterested finance, apathetic with respect to events that will enter the history books.