ROBECO - Tue, 01/11/2022 - 06:00

Further ‘gamification’, or back to fundamental investing?

First Futu, then WeBull, and now Longbridge. Taking the subway home in the evening, I have been amazed by the loud and aggressive campaigns for online brokers in Hong Kong’s Central Station. This in a year where the local Hang Seng Index was actually one of the worst-performing markets in the world (down 12%).

Speed read

  • Thoughtful long-term equity investors have been joined by inexperienced traders
  • In tighter monetary context, fundamental analysis should outlast gamified meme stocks
  • Buy what you know, healthy companies at attractive valuations

These brokers also offer their services in the US market though, and on Wall Street it was quite smooth sailing in 2021. Stocks closed almost 30% higher after a more than 20% return in 2020. The social element (“chat with your investor friends”) plays an important role in the campaigns. Investing is fun, lucrative, and so easy!!!

It is great to see so many new players with a newfound love for our favorite asset class equity! Robinhood encouraged a new group of equity investors when commissions were cut to zero. The patient and thoughtful long-term equity investors that trade infrequently have been joined by inexperienced traders looking for instant gratification.

On your phone, it has become so simple to buy a stock through the push of a button. For many, a stock is not more than a chart that is mostly going up, recommended by an influencer. If it disappoints, you can always get out the next day, at zero cost! The new traders have money and good ideas but are also likely to have weak hands when the going gets tough.

The equity game has also become a winner-takes-all game, with the US and ETFs on the winning side. Out of the nearly USD 1 trillion that was put to work in equity funds in 2021, more than 70% went into US equity. And, indeed, US companies do the best job in managing their shareholders’ equity, while in most other countries, other stakeholders need to be managed too.

American confidence in equity for the long run is as high as is Chinese trust in buying property. And even they may join the equity game after Evergrande has put an end to home price increases in China. Asian investors also want to put their money into the US winners that now go under the acronym -well-known to aging fans of the Muppet Show- MANA-MANA: (Microsoft, Apple, Nvidia, Alphabet, Meta, Amazon, Netflix, and Adobe). With a touch of Tesla to top it off.

ETFs have mopped up an amazing 93% of global equity fund flows in 2021. You buy an ETF as a basket of stocks with a common driver that sounds appealing, but you don’t know exactly what you are buying, nor at what multiple. Let us make the self-serving case here for actively managed funds where Robeco portfolio managers will continue to do the fundamental legwork, and make sure that the stocks in our baskets are still attractively valued.

Plentiful money supply

Many investors ‘play’ the market today with money being plentiful. This money has been provided by the printing presses of the world’s major central banks. At the same time, governments no longer seem to be bound by fiscal deficits, as they have spent lavishly during the Covid-19 pandemic, without any punishment from the ‘bond vigilantes’. Most likely, a chunk of that ‘emergency support’ landed in equity markets. The table below illustrates how much the global money supply has grown since the end of 2019.

Table 1 | Money supply (M2) in local currency trillions

Source: Bloomberg

No wonder that some folks now consider the world’s main currencies to be Monopoly or Mickey Mouse money. There is so much of it! Quite a few of these sceptics have looked into crypto markets to find protection. Supply here is capped by design for each currency, but there is no limit to the number of cryptocurrencies that could eventually be created.

Crypto clearly went mainstream in 2021. As I watched sports events such as European soccer or Formula One racing, the crypto exchange advertisements could not be overlooked. The overall market cap of these currencies is no longer insignificant – close to USD 2.3 trillion – but still less than the market cap of Apple, the world’s biggest stock, at USD 2.9 trillion.

More gamification can be found in the relatively young market for special purpose acquisition companies, or SPACs, as many of these equity deals are now done through celebrity endorsement. Buy a SPAC from your favorite sports star, music idol, or from ‘real estate icon’ Donald Trump. This way the rich and famous can literally monetize their fan clubs.

And on top of that, we now have the larger-than-life metaverse. Is it a game, is it for real? Investors are wrestling with the implications and the potential ‘winners’ of this trend. It must be important since Facebook even changed its name to Meta. It is hard to envisage a future where we all have a second life in a parallel online economy, but it is worth to revisit Spielberg’s 2018 movie Ready Player One, or to simply speak to teenagers. More games, that’s for sure!

In the real economy, central banks are aware they may have overdone their stimulus with inflation popping up in many areas. We will thus see more tightening announcements in the first quarter, as they try to normalize policies. The US Federal Reserve (Fed) is now expected to make its first hike in March 2022, with a few more planned for later in the year.

This has historically been a more difficult environment for emerging equity markets to perform. Recent US dollar strength contributes to our outlook being more muted here. For developed markets, our outlook remains bright. As the strong keep getting stronger, earnings expectations are still likely to be outgunned.

Supportive outlook for corporate earnings

In both developed and emerging markets, the outlook for corporate earnings remains supportive. 2021 was a bumper year, but we expect decent growth for 2022 as well. Here is another winner-takes-all element, as the large, listed companies are generally much less affected by the pandemic than the smaller companies, and particularly by those in the service sector.

What will 2022 look like? More fun and games for those in the market, or a return to old-fashioned investing? Well, we will definitely start with more games, as the 24th Winter Olympics will be held in Beijing in February. Investors wonder whether Chinese stocks can come back after offshore listings were hard hit by regulation and the burgeoning property sector was heavily curtailed in 2021.

A remarkable USD 50 billion of money has continued to flow into this underperforming market, which is a rare sight in momentum-driven markets. We remain fairly cautious for now, but the one country with decent real rates at least has room to support the economy via rate cuts.

In the end, it is likely that under a tightening monetary environment, fundamental analysis will outlast gamified meme stocks. The first quarter may still see the tail end of the ‘rally of everything’, but the likelihood of a more discerning market environment is increasing in 2022.


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