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Market in Pictures – September 2020

For September 2020, we have put together some visual highlights of the state of markets over the past month. We touch on energy stocks, European banks getting crushed, insights on value investing and a humorous look at analyst estimates.

September 2020 – Market in Pictures

Energy Stocks

When if ever will oil stocks stop their relative and absolute decline which in recent months has been nothing short of calamitous? Estimates are that energy stocks will soon comprise less than 2% of the S&P 500. While we note stories such as the export of new small nuclear reactors from Korea, we suspect that the complete doom for oil related companies might not yet be at hand. We also note, however dirty, many fossil fuels are still discernably cleaner than the 20 new coal plants recently announced by China. A recent chart that captured our interest was that of British Petroleum, for the last 25 years:

Yes, we do know that the chart does not include dividends and the (lucky?) owners of BP have certainly fared better than holders of German bank stocks which have a total return that is negative for a similar and very depressing amount of time.

A more interesting comparable is that of Exxon versus the S&P 500 and the price of one barrel of West Texas Intermediate crude oil.

Here we note what appears to be a notable divergence between the market and more dramatically, the price of oil itself. Aside from shifts in the longer-term prognosis for the use of fossil fuels in the global economy, what else might be destroying the valuation of energy related stocks?

A recent report from Bloomberg observed that Environmental and Social Governance (ESG) assets had now reached $40 trillion globally. While our knowledge of supply and demand elasticities might be limited, we do feel confident enough to state that flows of this magnitude will definitely drive prices. Investors might ask whether prices driven by ESG mandates reflect fundamental values or social ones?

Value Stocks

2020 has been a year of extremes, though the 10-year underperformance of Value versus Growth has now been a decade in the making.

Some have observed, perhaps very correctly, that value stocks have little intangible capital, such as that extant in Technology, and the so-called FAANG stocks in the United States and the BAT stocks within China. Valuation measures that exclude intangibles now exclude as much as 80% of market assets.

Interestingly, it is among smaller companies where the exclusion has the greatest impact, as pharmaceutical and biotech spend heavily on research and development, comprise a much greater share of small capitalization stocks (15%) than large capitalization (7%) stocks.

Looking closer at the small cap universe, we see the percentage of non-earners at historic highs. Collectively, the charts and observations above, suggest opportunities in small stocks with earnings in boring industries, places where hard work is done.



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