Where to invest now: my list of trends and super trends
It has been more than a year since the world was hit by COVID-19. And it doesn't look like the virus is going to give up. Even though we have vaccines available, shining as a soothing light at the end of the tunnel, there’s a long way till we really get back to situation we can call normal. I clearly remember some news headlines about a potential vaccine. As everyone expected and thought it would be a sure way out of the situation. Alas, there are even several types of vaccines, but no significant improvement, at least not yet. The vaccination process is not as smooth as we hoped for: there are many controversies, speculations and plain insinuations around them, adding turmoil to wired up emotions created by all sorts of lockdowns around the world.
With the launch of Covid-19, stock markets experienced a very severe fall, but recovered just as fast and now continue their way up as if nothing had happened. And if we look only at the stock markets we might think that the economy is doing better than ever. Since last year's "bottom", the market has risen 80% (S&P500), NASDAQ has risen even more (100%). Despite everything that is happening, last year was one of the best years in the financial markets. It is worth to note what George Soros once said about bubbles – “When I see a bubble forming, I hastily join it!”. And as we can see the results would be really excellent.
So, what now? For how long this rise will continue?
The first thing that catches the eye is the rise of FAANG: Facebook, Amazon, Apple, Netflix and Google. Graphically, it looks impressive. The Blue index – FAANG, the orange one: S&P500.
And again, I can’t stop to admire the graph of NASDAQ to S&P500 ratio. Doesn’t this look as a technology bubble again?
And how can you figure out at which point the bubble will burst? There’s a one big difference between initial Tech bubble and current situation, though. During the first bubble technology companies had very weak balance sheets as opposed to FAANG companies that looks very solid. However, for some time now, even before COVID-19 era, the new trend emerged, exposing large number of so-called “Zombie Companies”. Companies that have one very important common feature – they work at a loss.
Using Barchart tools, I downloaded the list of Russell 3000 companies and filtered out companies with negative "net income" from it. As simple as that. And here’s rather astonishing result: 33%! companies are operating at a loss.
Of course, one can argue that many of these companies are experiencing Covid initiated crisis, some are at the stage of development, investing in a R&D, new products etc. and most likely will be profitable at some point. But what if I tell you that right before the Dot Com Bubble era, this figure was only 29%, and in the rather recent GFC (Great Financial Crisis) case it was even lower: 25%.
I know, I know, it is a different situation. Yet, the current stock bubble did not appear all of a sudden, simultaneously with Covid, it was formed before that. Already in 2018, the “Wilshire to GDP ratio” repeated its historical highs and has now reached unprecedented heights.
The previous peaks now look relatively insignificant. How long will it last like this? I do not know. Bubbles can last a long time. And to predict something exactly is impossible. However, in my personal opinion this bubble will burst with the end of Covid or when the virus-related restrictions are lifted and free movement throughout the world will resume. When shops and restaurants will re-open and sports and cultural events will resume. When traveling become a norm again.
Why then? Well, right now rather large number of people don’t go out and don’t spend on shopping, dining out etc., at the same time receiving rather significant influx of money from government. Much of this money has gone to the stock markets because many spend so much time at the computer, trying to find something to do and exploring possibility to invest in the financial markets. Once Covid's restrictions are lifted, people will want to spend money rather than invest. Buy new clothes, spend time with friends, travel and have fun!
And then there will occur "fixation": people will start to take money out of these markets. I think that this is rather realistic scenario. Anyway, we need to continue to monitor the situation with Covid-19 since right now it is definitely the determining factor for this bubble to burst.
Where to invest now? If you really want to and can’t deal with FOMO factor – be my guest and go ahead. Invest in popular stocks or search the forums for the next "game stop". The sky is a limit.
If you are serious about it, look at sectors, industries, and directions that now have potential. Besides, as I already mentioned before, we need to keep up with the US Dollar. Because the Dollar and its value is a very big factor in the markets. Along with the weakness of the US Dollar, commodity and emerging markets start to grow. Thus, it is worth looking at the various commodities. For example, when I look at the Commodities index (I use the Thomson Reuters Index), we can see that commodities have been growing rapidly over the past year.
And when you zoom in, you can see that almost all raw material prices are in the "green zone".
So, here you can get some ideas. I would suggest not just simply get yourself into trading commodities as such and speculate on rising price but look for companies that are involved in these markets: companies that do mining, processing and transporting these commodities. For example, you can look for commodity ETFs, since Exchange traded funds are a very good option in this case.
Another good option for investment is technology sector. Simply because technology is still evolving at unprecedented speeds in all possible directions covering virtually everything. Remember the saying "software is eating the world"? It does really come through in a way. Covid-19 only accelerated processes of distant working, irrevocably changing working habits of many industries worldwide. Remote work puts on a table new set of opportunities that are not fully explored yet. The shift in employee and employer relationship is in progress setting new trend which needs to be further explored yet. As a matter of fact, this trend will affect a lot of things. Why should I return to office if I can do this job remotely? Why should I pay the huge rent for this large office space? Do I really need or want to spend hours on commuting each day? Do you see where I’m getting? The trend already was there before Covid-19 but it certainly gave it a significant push impacting practically everything we do.
For instance – why should I buy expensive real estate in downtown now and pay large sum of money up front? Perhaps I really don’t have to, do I? This paradigm shift is very powerful leaving long-lasting effect on many things. Recently I came across some survey’s (I can’t find the data but I’m sure you can google it if you want) results which revealed rather shocking insight: 90% of recent office workers no longer want to work full-time in the office, giving preference to “mixed work schedule”. And it makes sense, doesn’t it? I think this is rather strong trend to follow. Of course, I do not talk about those who associate being at work with being at the office building but those who rather prefer not spending time on commuting or usual office related stuff. These are persons who see an opportunity to improve their lifestyle and well-being. And not only employees see some benefits there. Business owners and managers see possibilities to considerably cut costs as well.
Very important factor for the technology sector is Blockchain. With rapid development of the Crypto market, blockchain technology has begun its winning streak.
Artificial intelligence (AI) is also a huge industry. As Mark Cuban recently said: “As big as PCs were an impact, as big as the internet was, AI is just going to dwarf it. And if you don’t understand it, you’re going to fall behind. Particularly if you run a business,”.
And definitely don’t forget about virtual reality (VR) – there is also a huge topic that has begun its triumphant march. Internet of Things is also worth a special blog post. So, as you can see the technology sector is really booming and I don’t think it will stop for some time!
Crypto currencies, tokens, digitization – I would say this is one of the super trends. Crypto currencies are already pretty much described in this blog, but their potential is so huge that it should not be ignored as too obvious or self-explanatory since for majority this is still very difficult to grasp. And here I’m not talking about Bitcoin. This is about THE POSSIBILITY OF DIGITIZING ASSETS. This is about financial technologies and asset alternatives as such. Virtually unlimited field of work with strong resemblance to the development of the Internet as we know it.
And I’m not done here.
Another strong trend, in my opinion, is the Cannabis sector. I see a huge potential here. Why Cannabis and why now? More and more countries decriminalize marijuana, setting new boundaries of New normal and forming new set of habits and entertainment not available previously. We can see that the number of people embracing and advocating these benefits rise exponentially. Of course, the most popular product is marijuana as such, but many other products that are gaining ground in the market are also developing very rapidly.
If we look at simpler type of investments, probably the easiest way is to invest in ETFs. Here’s a list of the most popular ETFs at the moment.
The results of the largest ETFs are visually very pleasing, aren’t they? And this market only now beginning to gain momentum. Look at the chart below where I have gathered data of the four largest ETFs in this sector. It looks really nice, the trend is good, and correction as well. It is definitely worth to look into this!
Another sector that has been in the spotlight for the last year is pharmaceutical and biotechnology. Never ever all sorts of media had so much coverage on human health issues, immune system, viruses, medicine, drugs, vitamins, food supplements etc. Pharmaceutical topics are discussed not only by doctors and journalists but by all sorts of individuals who has access their own media platforms to express their personal opinion. Some companies definitely will benefit from this immense interest in pharmaceuticals and biotechnology. With an emphasis on health as such, emphasizing on a healthy lifestyle and other related things and topics. There will be many companies that will start offering their "super products", framing their narrative around FOMO ("you can't deal with your daily life without this"). Thus, the health trend will definitely continue to evolve along with many related things: smart watches, applications, sports programs, sports nutrition, vitamins, etc.
And I’m not done here.
The next super trend is India. By 2030, India's GDP is expected to be the third largest in the world.
India will be one of the largest consumers in the world. A market that will develop very fast and will provide a lot of opportunities to invest, much like it has been with China before. In a way we can say that India is an alternative to China. India is improving its business environment year by year. According to the recent Doing Business Reports of the World Bank, India has consistently and significantly improved its ranking in recent years from 142 in 2015 to 130 in 2017, to 100 in 2018, to 77 in 2019 and to 63 in 2020.
A huge jump of 79 spots over the period from 2015 to 2020!
The Indian stock market has already made a huge rise, but this is just the beginning – the expected growth is set on a very high level. So, to better understand the potential – if now it seems that the S&P500 is experiencing huge growth, compare this to India stock market where almost everything grows at the level of Tesla and Bitcoin. Look at this chart showing India’s stock market (SENSEX), S&P500, emerging market (MMEH2021) and global index (ACWI). And, as I already said, the Indian market is just gaining momentum.
To sum it all up, there is no need or necessity “to short” the stock market. This can be a long painful process. Because that's exactly what's happening to me - I have a huge desire to see S&P500 to drop, to see the bubble burst, but as it does not happen for rather long time now. So, it is better to look for opportunities in trends, industries and companies where there’s a potential for further growth.