Dear Financial Voice Reader,
Why is the stock market near an all time high, as I mentioned.
Why? Company profits. Markets move on expectations. We expected far worse earnings after the credit crunch. So stock markets sold off and became cheap. Companies expected poor profits and so they cut costs. But exports held up. Disaster was denied, or at least delayed by ‘QE’ and so the consumer merrily bought and China and India did too. So profits rose.
Of the US stocks, the most recommended largest US stocks are: Samsung, Coca-cola, Apple (I am a shareholder), Goldman Sachs (I am a shareholder), Google, Oracle, Chevron, according to data by Bloomberg.
Am I not forgetting something? Unemployment, EU country default dangers, government spending cuts, tax rises, inflation, and commodity prices, rising oil? Surely stock prices cannot rise with all this going on? Ummm…yes they can. Unemployment is receding. EU debt defaults are being bailed out by printing money, which yes causes inflation which in turn leads to rising stock prices anyway; government spending cuts are being substituted by private sector orders for companies, commodity prices are being hedged by companies or leading to outright profits. So where is the pain? Tax, but it is slowing down growth, not killing it.
But do consider some warnings. To quote Warren Buffett, “We see the growth in corporate profits as being largely tied to the business done in the country (GDP), and we see GDP growing at a real rate of about 3%. In addition, we have hypothesized 2% inflation. If profits do indeed grow along with GDP, at about a 5% rate, the valuation placed on American business is unlikely to climb by much more than that. Add in something for dividends, and you emerge with returns from equities that are dramatically less than most investors have either experienced in the past or expect in the future. If investor expectations become more realistic — and they almost certainly will — the market adjustment is apt to be severe, particularly in sectors in which speculation has been concentrated… “Fools give you reasons, wise men never try.”
The thing is all of the above was written 4 years ago. Clearly a fool and his money – are some party.
On this basis, given that India has the highest GDP of any democracy in the world – your returns are clearly best there. But never mind my views, or those of Warren Buffett’s – what about yours? So in the age of Facebook in anticipation of this article I posted a poll: ‘If you had to invest in the equities of one of these countries which is your favourite?’ The results at the time of writing are: 58% for India; 25% for US; 0% for China, 8% for UK and 8% for Japan.
Back to caution: “Examine the record of, say, the 200 highest earning companies from 1970 or 1980and tabulate how many have increased per-share earnings by 15% annually since those dates. You will find that only a handful have. I would wager you a very significant sum that fewer than 10 of the 200 most profitable companies in 2000 will attain 15% annual growth in earnings-per-share over the next 20 years,” said Warren Buffett. The point is the current rate of profit growth which some of the large British and US companies are producing presently cannot of course last. But the issue with the market is always ‘when’ not ‘how’ or ‘what’. So when will the music end?
Alpesh Patel
