From the editor...
“If something cannot go on forever, it will stop.” Unsustainable trends always end and cycles, short-term and long-term, turn. US economist Herb Stein was talking about a balance of payments crisis when he coined “Stein’s law”, but it is universal.
The dotcom bubble, burgeoning private and public debt in the 2000s, and the inflation that eventually resulted from the endless money printing of the past two decades are just some of the key trends investors have had to grapple with since MoneyWeek was launched.
Quite when the unsustainable trend ends, of course, is the question. Just when you think a country or market has hit bottom, it starts to dig. Enter Argentina, which has lurched from self-induced crisis to self-induced crisis for a century (see page 38). In 1914 it was richer than Germany, but now it is widely deemed a basket case among emerging markets.
Hitting rock bottom
But as James explains on page 20, chronic mismanagement has obscured an economy brimming with promise. Argentina boasts more unicorns (privately held technology companies worth more than $1bn) than any other country in the region. And it is sitting on natural resources crucial to the energy transition.
It should be only a matter of time before the country’s potential is unleashed, so it may be worth dipping a toe in the market before the improving outlook draws in the crowds.
If that is too racy a prospect for you, consider another trend that has been going on for ages and can’t last forever: the UK stockmarket’s large discount to its global counterparts. Global investors continue to shun London, according to the latest survey of global fund managers by Bank of America (see page 26): 21% say they are underweight British stocks, up from 6% last month.
The chaos surrounding Brexit and the exit from the single market has unnerved investors, and the market is considered unexciting because of its skew towards oldeconomy stocks. Even adjusting for sectoral composition, however, our stocks are on average 18% cheaper than their developed-market counterparts on a range of valuation measures, estimates Panmure Gordon’s Simon French. He also notes that a company whose earnings are expected to grow by 50% over the next three years will be on a price/ earnings (p/e) ratio of 16 here, compared with 19 in Europe and 24 in America.
Spotting a bargain
Moreover, Unilever is on a p/e of 16 while its US counterpart Procter & Gamble costs 26 times profits; Shell and BP are on whopping discounts to the likes of Exxon. The UK-listed firms are not struggling. They are just marked down because they are in London. Absolute and relative valuations revert to the mean over the long term, and eventually global fund managers will surely be tempted by the discount.
Private-equity investors already are, judging by the surge in takeovers we have seen recently. In April alone we have seen seven offers, including ones for THG, Industrials Reit and Medica Group, a telemedicine provider. When will the unsustainable trend end? Matthew Lynn suggests a possible trigger on page 15.
“More than a fifth of global fund managers say they are underweight UK equities”