Last week I wrote a piece on rotation between different investment assets and suggested some of the bigger movements were yet to come. One week on and the pace appears to be quickening, especially in US equity markets that hitherto have been outperforming everywhere else, driven largely by momentum investing. Even momentum investing needs some sort of external justification and in recent years the growth prospects of a select number of US companies has been enough to keep both their prices and the overall indices moving up. However, it seems that more attention is starting to be paid to actual rather than prospective growth and in this respect Q3 earnings are clearly disappointing some investors. It is not that the overall numbers being reported are bad: the ritual quarterly games between companies and analysts are so far resulting in most companies’ top-line sales growth and earnings per share both exceeding estimates. The trouble seems to be that the those estimates have not been beaten by a large enough margin and, even worse, the best results are in the ‘wrong’ sectors: i.e. in Real Estate and Materials but not in IT and even less in Energy. Perhaps expectations had simply got too far ahead of reality. However, the problem with momentum investing is that once prices stop going up they usually fall quite sharply as ordinary investors realise that the smart money is already leaving. A major sell-off in US equities is never good news but value investors can allow themselves to smile as they look for the real bargains amongst the falling idols.
For the last five years it has been very hard to portray Gold as a ‘store of value’ and, of course, Warren Buffet has always been dismissive of an asset that offered no return other than if somebody gave you more than you paid for it. Gold has also been touted as a protection against inflation but that has not been put to the test for many years and the outlook remains subdued. Treating Gold as sort of insurance policy may seem prudent or even virtuous but begs the question of what is being insured against. Looking at charts of Gold Futures and in particular at the rally this October, it may just be that Gold, having been downgraded to another asset class, is benefiting from investors’ rotating back into it after years of infatuation with Tech stocks. A more interesting line of enquiry might be to look at long-neglected gold miner stocks and see which ones have been coping better than others. Even if the price of Gold itself does not take off the new appetite for rotation may well uncover untapped value in some mining shares. Indeed, it may already have started.