Transcript

Charlotte de Kerpoisson: Hello and welcome to another podcast by BNP Paribas Wealth Management. My name is Charlotte de Kerpoisson. In this podcast we are going to talk about the stock market performance over the summer. We’ll analyse what has been driving stock momentum so far, look at some numbers and try to understand whether this momentum can continue, or if on the contrary, investors should remain on their guard, and brace themselves for a market downturn. To help us get up to speed with this topic, Edmund Shing, Global Chief Investment Officer of BNP Paribas Wealth Management is my guest today. Hello Edmund.

Edmund Shing: Hello Charlotte.

Charlotte de Kerpoisson: August is a peculiar month, isn’t it?  People working in European and American financial markets often take their main holiday in August during the summer lull. Many investors and clients are away from their desks, and let’s face it, the markets are usually very quiet, and trading is thin. But anyone who has been following the markets for a couple of decades or so, will know that the summer months can spring nasty surprises. Remember the subprime crisis that began in the summer of 2007, sending shock waves throughout the credit markets.   A year later we witnessed the very painful collapse of Lehman Brothers that many still cannot believe. Again in the month of August 2011, the American stock market fell. A decade ago in August, the Dow Jones fell 588 points in only 2 days, a movement which had repercussions on global stock markets. And in August last year, the Tokyo stock market crashed. So Edmund, this summer at least, clearly the markets are on a roll.  Can you summarise the stock performance in particular in August?

Edmund Shing: Stock markets around the world have performed a lot better than one might have expected. As you've mentioned, from a seasonal perspective there is usually the summer lull particularly
in markets outside of the US where they do tend to fall back a little bit particularly when they've had a good start of the year. This year, however, we have not seen that
yet. Although I say that because in fact statistically-speaking, September is the worst
month of the year for stock markets around the world. So we may have successfully navigated August but we have September still to come and I don't think we'll be able to finally breathe a sigh of relief until we are in mid-October. That being said where are we right now? What has the recent performance been? Well it's been very positive. Many stock markets around the world including, but not just limited to, the US have hit new multi-year or all-time highs and they're up double digits in local currencies for the year. Now what stock markets are these? Well we can start with the UK. We can then move on to Korea. We can think about Japan with the Topix and the Nikkei 225. We can also talk about China. We can talk more generally about MSCI Emerging Markets excluding China. So the list goes on and on. And even within Europe while it's not at a multi-year high, mid- and small- caps within Europe are breaching new highs as we speak.

Charlotte de Kerpoisson: What are the main factors driving this positive momentum? I mean was August different from previous years?

Edmund Shing: I don't think August was particularly different from previous years. As I’ve said the earnings results of companies in the US and outside of the US have been important. That's been one positive factor. I would say the liquidity, particularly in terms of broad money supply growth, has been a second factor that's helped and thirdly the fact that bond yields at least up until now, so long-term interest rates, have been relatively well behaved. So that has underpinned valuations, has not threatened the valuations of stocks as it can do if bond yields rise sharply. So these have all been quite positive factors. But it's sort of interesting that if you look historically at the performance of stocks, they tend to do well not when economic growth is at its strongest, but when economic growth is positive but reasonable, when inflation isn't doing anything particularly aggressive and when interest rates are flat or falling. Now that's exactly what we've had. If you look at central banks around the world we have had interest rates in general that have either been held steady, such as by the Fed in theUS, or which have been falling such has been the case with the European Central Bank in the eurozone. So these have all been very supportive factors this time around.

Charlotte de Kerpoisson: Edmund do you see a growth bubble forming in US stocks at the moment?

Edmund Shing: There is certainly suspicion with the valuation of large cap stocks, the S&P 500, at pretty much historic highs at 23 times forwards PE and even higher Ps registered by for instance the Magnificent 7 group of mega cap tech stocks in the US. There is the suspicion that we are seeing somewhat of a mini bubble forming in these US large cap tech stocks and in a number of other sort of mini-bubbles in other mini themes. For instance we could think about quantum computing, we could think about small modular reactors in nuclear. We can think about everything related to cryptocurrencies and so-called cryptocurrency treasury companies. So there are a number of mini bubbles. But I would always warn the investor that the biggest risk is sometimes in becoming defensive too early. Bubbles can inflate for an awfully long time. Markets, as John Maynard Keynes has remarked in the past, can stay irrational longer than investors can stay solvent. So in a sense even if it is the case that many bubbles are forming, it may be early days. We could be in the equivalent for instance of 1998 and in those days with the tech bubble this continued for another one and a half to two years and markets went up an awful lot more before they finally peaked. So I would say for now the trend is your friend and you should keep an eye open and be vigilant. But on the other hand do not cash in your chips and turn defensive too early.

Charlotte de Kerpoisson: But that said, still should investors be cautious of the high market performance. Risks clearly remain and September as you said is seen as the weakest month of the year for stocks so a correction may be close at hand. In other words, shouldn't investors stop buying and on the contrary start selling off their stocks Edmund?

Edmund Shing: We look at investment as a long-term game so I don't think you should be looking at one month and calling investment decisions based on the risks of a fall over one month. We're lookingfor the long term. And in the long term let's not forget after September you actually have from the middle of October until April the following year actually the “Halloween effect” which signifies the most positive six months of the year. So yes September might be a bit rocky but then the six months after that could prove to be pretty positive once again. So the easiest thing for an investor who is already invested in stocks to do is to stay invested in stocks. Maybe don't add to your stock exposure at this point, maybe wait until October but certainly I think to sell down your stock exposure is a risky strategy on a tactical basis and risks are actually missing out on the subsequent likely positive performance from October onwards.

Charlotte de Kerpoisson: So if investors decide not to continue stock piling, where else could they invest in the global
economy?

Edmund Shing: Well I think World ex-US is where the momentum is right now even though the US marketsare at an all-time high. Of course if you're not based in US dollars but based in another currency
like Sterling or euros or even Swiss francs, then of course the momentum and the performance of US stocks in your currency looks a lot worse given the depreciation of the dollar against these
currencies over the last few months. So as a euro-based investor for instance you're still down over the year-to-date if you're invested in the S&P 500 because translated back into euros
the loss in the dollar has outweighed the positive performance from US stocks on a local currencybasis in dollars.

So actually World ex-US looks good so I would come back to looking at selected areas in Europe for instance continued strength in Spain. We see strength in the UK which continues to actually get better. Instead of value markets, I would look also to certain emerging markets again this could be including or excluding China. We've seen a lot of positive momentum from markets such as Mexico, from Poland from Vietnam to a name just a few. And of course we can also think about China itself. I think China is still seeing a strong rally at the moment and we are seeing some strong results  particularly from the technology stocks in China. There are a number of reasonably-valued stock markets around the world even if the US seems a little expensive at the moment.

Charlotte de Kerpoisson: Thank you very much Edmund. That brings us to the end of this podcast. Please like share and subscribe to our weekly podcast channel until next time goodbye.