• What could possibly reverse US stocks? Lex thinks that the US has become a safety trade — as can be seen in the leadership of big-cap stocks and defensive sectors. So if the rest of the world starts to look a bit better (hard to imagine at the moment, of course, but that is exactly the point) the trade could unwind badly. Alternatively, if US companies could stop buying vast piles of their own shares, the treads will come right off the tank. Why this would happen Lex doesn’t know, but we’re thinking about it.
• What is the way to play emerging markets next year, given their sensitivity to all the factors that US shares ignore? Well, one can look to companies that sell to the US, such as manufacturers in Taiwan and Korea. Or one could hope for further political alpha in India.
• Thailand is an emerging market that has done well recently, particularly since the military coup in May. A tremor in SET index this week might just have been business as usual for an illiquid emerging market index. But the Thai economy is not strong. Political stability may not last for ever. Lex Advanced Long/Short Advisors is short the SET (note: LALA does not exist, and wouldn’t give investing advice if it did).
• What is a company to do if it is not lucky enough to be in the US? It is to merge. BT plans to buy EE, giving the full wireless/landline data package. It’s a sensible, if not wonderfully cheap, deal. It is worth saying, though, that it has nothing to do with growth. It’s about establishing a stable customer base and cutting costs.
• BP is about as far from the safety of the US as it is possible to be. It is up to its chest in Russia. It owns a fifth of Rosneft. Its dividend from Rosneft comes in roubles. And Rosneft contributes most of its forecast production growth. A further oil price decline will put the Russian company’s production targets in danger.
• Is 2015 the year when a cyber attack does permanent damage to a major corporation? Sony’s troubles with The Interview this week give a small taste of how an anonymous (not to say Anonymous) cyber thug can have a business impact. Lex hopes that the hoodlums behind the attack are forced to watch as Sony makes The Interview, despite the lack of a theatrical release, into an economic or public relations success.
To close on a seasonal note: Lex does not wish a Merry Christmas to executives who get paid based on the basis of total shareholder returns during their time in charge, whether with options or otherwise. We join an increasing number of pundits in pointing out that this doesn’t seem to be working out well for companies or shareholders. Bah humbug! Normal old salaries next year!
Season’s greetings to everyone else, and our thanks for reading the column this year.
All best
Robert Armstrong
Head of Lex