August 2020 - A handful of stocks driving the equity market euphoria - Systematic Fund Manager's Comments

14 September 2020

Emmanuel Hauptmann

When the market starts showing signs of “irrational exuberance”, it is difficult to refrain from drawing historical similarities. The recent rally, especially for the NASDAQ, recalls us the late 90’s. The Fed Chairman Alan Greenspan was forced to cut rates in October 1998 to bring back liquidity to the markets after the LTCM debacle. The main beneficiaries were Technology stocks, which had a tremendous run. The rest of the story and how the market unraveled is known to everyone. However, it would be too simple to think that the current situation would develop in the same way. What is certain low rates alone can’t act as a safety net for all the extreme situations in financial markets today.

Far from being penny stocks, the likes of Tesla and Apple had a tremendous run over the past weeks, namely due to:

  • The thirst by the market for growth companies and long duration assets
  • The recent stock split operation, making the stock accessible to Robinhood accounts and triggering further euphoria
  • Fed’s inflation target adjustment, allowing any overshoots and opening the door for keeping interest rates low for longer

The case of Tesla – a puzzling market cap

The company might be close to being able to bring lighter and durable batteries or significantly increase its production capacity, but the fact remains that its market cap has almost reached that of the top 5 global automobile manufacturers combined. In 2019, Toyota alone sold just under 11 million vehicles, while Tesla sold less than 300’000 cars.

Source: Bloomberg, RAM AI, as of 31.08.2020

In the wake of the Fed’s announcement, highly levered and low quality companies’ stock benefitted from the news, while Value names continued to be ignored by market participants. Additionally, cosmetic operations such as stock split have pushed some segments of the market to unchartered territory. In our view, investors shouldn’t be fooled by the level of equity indices, as a handful of stocks are “partying like it’s 1999”. The key is to remain well diversified in terms of strategy and market cap, and be focused on liquidity.

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