Ignore the noise and follow the money

As we move towards the end of the year, the discussion heats up on whether we will see the usual end-of-year rally.

Markets have not behaved the way they usually do. However, one could argue, it is due to the unpredictable events that have popped up this year, and these issues continue to plague the markets. One of them is the lacklustre US economic data, exacerbated by the political wrangling. The other is the on-going estimate of when the Fed will start to taper to prevent the bubble like price action in certain assets. Both issues have been discounted by investors when the US bourses continue to inch higher.

It makes sense that US economic data damaged by DC is ignored. However, the larger issue of companies outperforming and rising without earnings, should be an attention-grabbing indicator of a larger concern.

The obvious case at this point is the technology stocks in the US and emerging markets, both at a five-year high. Although the MSCI US Technology index is shy from its all-time high and has come off slightly, the MSCI Emerging Markets Technology index has surpassed its record high, in Jan 2011, by 13%.

Today, we live in a world where the largest company, by market cap, is Apple ($478 billion stock-market cap, 13 times earnings). Facebook ($117 billion stock-market cap, 115 times earnings) has a larger market cap than Goldman Sachs ($76 billion stock-market cap, 10 times earnings). Apple beat Exxon Mobil to snag the top spot, and the third largest in the world is Google ($342 billion stock-market cap, 29 times earnings).

Reading down the list, it dawned on me, it was only last year when Chinese companies such as PetroChina, ICBC and China Mobile were included in the top 10 spots. Two things are apparent – firstly, the markets are fleeting. Secondly, the Fed sees the role they have played in creating the market surge of these companies, by maintaining near zero interest rates and enticing investors to park their money in riskier assets. It now depends on whether they choose to act on it or not.

There are various reasons made by technology analysts why this is different from the tech bubble in the 1990’s. From a valuation perspective, it isn’t as toppish to the obvious that technology companies today have a better business model and customers want their product.

Twitter, the latest social-media company who’s about to go public, is dominating the media, commanding hype and premium by pricing above its initial IPO range of $17-$20, to $23-$25.

Investors also face an internal tug of war, where tapering would rein in price action that have run off without fundamentals. It is a good thing in the long-run, but that also means the portfolio will suffer in the short-run with a correction. The question then shouldn’t be whether there will be an end-of-year rally, but how you would position yourself ahead of what could happen.

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