The Growing Disconnect?

With earnings season drawing close, one can’t help, but notice a distinct pattern that has emerged from this season. As the regular understanding goes, stellar results can seldom fail to give a fillip to the stock price. But this season proved otherwise. All that stellar results could do for any company, esp. in the broader space, was to stop the bleed, not reversing it. Such is the dislocation in the broader market. As a result, the disconnect between the price and value has worsened to worrying levels reflecting huge nervousness among investors. But looking from a contrarian perspective, valuations couldn’t be more attractive, esp. where the earnings have shown distinct upside momentum.

The positive news doesn’t just stop with the earnings. The positives are slowly and steadily out-weighing the negatives since the dawn of 2019. While the market, in its myopic mood, has ignored the growing positives that are listed below, when it will swing to the other extreme is anyone’s guess.

  • Rising hopes of trade settlement between China and US.
  • Receding fears of no-deal BrExit and hopes of its postponement.
  • Resumption of EM (Emerging Markets) carry trade with taps opening for EM flows.
  • Buoyancy in emerging market index (MSCI emerging market index is up by over 7% since the dawn of the new year)
  • Prospect of pause in the Fed’s interest rate hike cycle etc.

Of course, market sees more merit in the local liquidity fears and political uncertainties than heeding to the changing global cues. That could as well be right from the short-term perspective. But for long-term investors, they must take cues from the earlier political cycles to draw lessons that electoral outcomes hardly dictates market’s long-term trend. This understanding should help them to ignore the market’s political tantrums and use them to their advantage by investing into the volatility.

Happy Value Investing!

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