“The time had come, as in all periods of speculation, when men sought not to be persuaded of the reality of things but to find excuses for escaping into the new world of fantasy.”
– John Kenneth Galbraith, “The Great Crash, 1929”
This edition of our Gavekal EVA is written by one of my closest friends, who also happens to be my partner, Louis Gave. As Louis points out in this note, January market trends historically set the direction for the full year per his title “As January Goes”. Well, so far, not so good!
As I’m sure most EVA readers have noticed, 2022 is off to a rocky start so far, especially for the former high-flyers. Most of these were losing considerable altitude even before the calendar flipped to the new year.
In reality, the damage done in recent months goes beyond the frothy parts of the stock market and has impacted nearly all high-risk “assets”. Louis cites the poster child for aggressive investing, Bitcoin, which has tumbled almost 40% in just two months. For most asset classes, that would be a shocker but for the King of Cryptos it’s just another hiccup on the way to $1,000,000—or whatever is the latest aspirational price target by its die-hard fans. Regardless, it is a reflection of the “risk-off” mindset that has become increasingly evident and, as Louis discusses, this goes well beyond cryptocurrencies.
On the positive side, the energy sector is off to a strong start and Louis articulates why he thinks it has further upside. As you will see, he’s additionally upbeat on financial stocks and Japanese equities. Those are two of my most favored areas, as well. (He is also bullish on Chinese high yield bonds but those are nearly impossible for US investors to access.)
On a related note, Louis is also highlighting how cheap the Japanese yen is presently. While I agree wholeheartedly, I realize most investors are averse to betting on currency swings. However, there are two ETFs that track the yen, including one that provides twice the upside (and downside). A far more mainstream vehicle is the primary Japanese stock market ETF that should benefit from an undervalued yen due to Japan’s status as a major exporter. This has been a recurring recommendation of our Positioning Recommendations section (formerly, Likes/Neutrals/Dislikes) and, in my view, it remains appealing for the reasons Louis outlines.