Beware potential bubbles, bet on takeovers and more fearless market predictions
Last year, my “predictions” column was tongue-in-cheek, but we nailed them. Basically, the only prediction we missed was that markets will take a huge dip sometime during the year. The others (companies will make lots of money, investors will worry, the bull market will continue, higher interest rates won’t matter) were spot on.
This year, we will take a more direct prediction approach. Here goes:
A ‘BUBBLE’ IS GOING TO POP, BADLY
Now, to cover our bases we are not going to predict which bubble, but there are many these days and investors are in a frenzy. This likely will not end well. Lithium, cobalt, bitcoin, marijuana — you name it and there is at least the potential of a bubble forming in all. Our bet on which one will pop? Marijuana. Think about it. If you are not smoking pot now, are you suddenly going to start toking up next July? Unlikely. In addition, if every single person in Canada spent $100 a year on pot, the market would still only be $3.7 billion. But based on the market valuation of public marijuana companies, investors seem to think the market size is going to be $20 billion. We would expect marijuana stocks to perk up into July and then likely roll over when quarterly numbers reveal far less growth than expected. What about bitcoin? Who really knows. We think the cryptocurrency itself, though, will have a lot more staying power than the hundreds of companies that have suddenly entered the “mining” industry and really have nothing but computers so far (we have a much greater analysis of bitcoin in the blog section of the 5i Research website).
MARKETS WILL DO WELL
Despite strong corporate profits, low interest rates and global growth, investors we talk to are continually looking over their shoulders, waiting for the next crisis, the next market crash or at least the next big correction. We know many, many investors sitting on cash waiting for a buying opportunity. But just because a market is strong does not automatically mean it is going to be weak. There is a generational shift occurring from bonds to stocks as interest rates rise. With buybacks and fewer IPOs and privatizations and takeovers, stocks are actually becoming scarcer. Rarely is there a market crash when everyone is looking for one. We would expect more good markets in 2018 until we reach the “overconfidence” stage. Based on our conversations with investors we don’t think we are anywhere near that yet.
CANADIAN MARKETS WILL OUTPERFORM
With global synchronized growth (expect to hear a lot of that phrase in 2018) it would make sense for resources to finally start acting a bit better. And if resources move, the TSX will move. This plus Canada’s relative underperformance versus world markets in recent years should help Canada’s market recover somewhat. This prediction we have less confidence in, however. With higher rates in the U.S., the U.S. dollar could be strong and the U.S. economy is very clearly on a roll. Tax cuts in the U.S. and a return of business confidence might still mean the U.S. market whips our market again in 2018.
MASSIVE TAKEOVERS AND PRIVATIZATIONS WILL OCCUR
Think of all the deals that have been announced recently and then remember we are basically in holiday season. When business fully returns in January, we think we will see corporate executives examine the landscape. They will see low interest rates, decent valuations and lots of available credit. They will see strong margins and profits and job growth. Combined, this will result in more confidence. Confidence and credit makes for a powerful combination. We would expect to see, almost daily, announcements of public company takeovers. Some will be at huge premiums, such as the recent takeover of Pure Technologies (PUR on TSX) at a 102 per cent premium. Xylem, the buyer, was happy to pay that premium as the deal is still accretive to its financial results even at that level.
SPOTIFY WON’T LAST THE YEAR AS A PUBLIC COMPANY
Spotify, the world’s leading music-streaming service, plans to go public via a direct listing (no shares will be sold by the company) very soon. Once public, we think it will quickly become a target. Amazon, Alphabet Inc., Disney, Apple and Netflix might all want to expand their music market share or get into the lucrative music-streaming industry. Alphabet Inc. could quickly pass Apple Music with a buy of Spotify. Amazon could cross-sell all of its offerings to Spotify’s large and loyal customer base. We think it would make the most sense for Netflix, though. Unlike the other companies, Netflix’s main business is streaming content and it does it very well. A combination with Spotify would allow Netflix to bundle services, expand its customer base and nicely diversify its business. Spotify now has an estimated valuation of $17 billion or so, making it a very easy purchase for any of the companies mentioned above. In fact, a $20-billion purchase would be less than 10 per cent of Apple’s current available cash balance.
Good luck with your investing in 2018.