Although equity markets have always been subject to equally irrational bouts of exuberance and despair, we appear to be living through especially volatile times. Since the COVID-19 lockdowns, wider participation of amateur day traders in markets has certainly added even more unpredictability to the mix.
As we saw during the meme stock craze of 2021—when social media users coordinated a short squeeze of the GameStop stock—sanity will eventually prevail. The hedge funds and Reddit users that participated in the early stages of the short squeeze profited handsomely. Others that were late to join the bandwagon racked up significant losses when they held onto the stock as it started to fall.
This is an example of the ‘greater fool theory’—the idea that one fool can safely overpay for an overpriced asset because they can sell it for a profit to an even greater fool. In recent weeks, we have seen a similar drama play out with an obscure stock named VinFast Auto, an unprofitable electric-vehicle manufacturer.
After a four-week trading frenzy, VinFast Auto had a market value greater than McDonald’s. But the stock rapidly plummeted by 80% from its peak as the supply of greater fools ran dry. Apart from other meme stocks, cryptocurrencies are frequently named as examples of the greater fool theory in action. The jury is still out on that one.
Back to VinFast—what makes it different from Tesla, Nvidia and other BigTech stocks that have seen valuations soar dramatically this year? Firstly, those stocks have attracted strong institutional backing, are too large to be easily manipulated or moved by day traders, and are delivering results that inspire market confidence.
There is a case to be made that some of the Magnificent Seven BigTech stocks may still be overvalued – with Apple and Nvidia both notching their second-worst falls of the year – which is why the principles of diversification and non-thematic investing have proven effective in mitigating concentration risk. Dynasty’s approach to portfolio construction is to incorporate broader indices – where we capture the new winners which increase in weighting as a result of their market capitalisations increasing and visa versa – together with actively managed components with a focus on underlying businesses that have proven track records, as well as a clearer line of sight in terms of future earnings growth.
This latter approach is summed up by one of our preferred offshore managers as “Buy good businesses; don’t overpay; and do nothing”. It’s a far cry from betting on the caprices of any single stock in the hopes of selling it high and getting rich fast.
“The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants.”
– Ashwin Sanghi, Indian novelist
Global News
- Underlying US inflation gained 4.3% year-on-year in August, in line with estimates and the smallest gain in nearly two years. However, it grew at a faster-than-expected monthly pace (0.3%) in August, underscoring the bumpy nature of easing price pressures. This leaves the door open for the Fed to continue hiking interest rates, with the possibility for one more hike.
- Yet, Treasury Secretary Janet Yellen is confident that the US will be able to contain inflation without major damage to the job market, due to a slowdown in inflation and more job hunters. However, Wall Street is concerned about an economy that will be too hot as the chance of a recession dwindles.
- The European Central Bank hiked interest rates by 25bps to a record 4% to try put the lid on interest rates. This is the 10th consecutive time it has hiked borrowing costs. Economists have deemed this to be the likely peak in the currency region’s most aggressive monetary tightening cycle to date.
- The European Union will investigate China’s state support for makers of electric vehicles, which gives China a price benefit over cars made in the Euro zone. However, China has lashed out at the EU’s investigation, arguing it will harm relations. Communist Party tabloid Global Times said a curb will hurt Europe’s economy, while there are worries it could also lead to a trade war.
- The People’s Bank of China trimmed the amount of cash banks must hold in reserve for the second time this year. It lowered the reserve requirement ratio for most banks by 25bps, taking the weighted average of the requirement for banks to 7.4% after the reduction. It seeks to help banks support government spending to boost the slowing economy, although industrial production and retails sales increased sharply last month from a year earlier.
- In a move which is likely to disrupt the global bank sector, Visa is set to partner with the crypto world to solve the problem of cross-border settlements to merchants. It will allow merchants offering credit card facilities to be paid in seconds, instead of the days it takes via legacy banking models.
- Tech majors (including Google, Facebook, and Meta) met with Washington lawmakers on Wednesday to discuss AI and future regulations. At the AI Insight Forum, Elon Musk warned of civilisational risks posed by AI. Sundar Pichai of Google highlighted the technology’s potential to solve health and energy problems. And Mark Zuckerberg of Meta stressed the importance of open and transparent AI systems.
- Oracle shares dropped the most in 21 years after reporting a slowdown in the growth of its cloud business. It wants to compete more with Amazon, Microsoft, and Google, although this raises questions about its expansion in this market.
- The sudden departure of BP CEO Bernard Looney comes after he failed to fully disclose some of his past relationships with colleagues. More than 1,000 CEOs have left companies this year as their performance — and their behaviour — have come under increased scrutiny by their boards of directors.
- As at Thursday’s close the S&P was 1.1% up for the week.
Local News
- Research into who funds South Africa’s political parties shows that the Oppenheimers have donated more than R40 million to opposition parties since the start of the 2021 financial year and are in the top eight. Just one of the top funders — mining magnate Patrice Motsepe — donates to the ruling party. One of the ANC’s major sources of money includes United Manganese of Kalahari, which has links to Russian oligarch Viktor Vekselberg. Other big donors include Capitec Bank founder Michiel le Roux, online gambling tycoon Martin Moshal, philanthropists Mary Slack, Victoria Freudenheim, and Jessica Slack-Jell. Herman Mashaba is also on the list.
- According to Justice Malala, BusinessLIVE columnist, the fact that there are a multitude of political parties contesting next year’s elections helps keep the ANC in power. He backs this up by stating that the opposition’s disarray gives the ANC a clear path to retaining power and leaving the country with the same leaders.
- Several international finance institutions are offering to provide billions to help Eskom pay for the R210 billion transmission grid upgrade by 2030 as South Africa is at the brink of Stage 7 with more than 45% of Eskom’s installed power generation capacity being offline at some stages.
- South Africa is heading for a fiscal cliff after being warned about it for a decade, leaving government hunting for money. National Treasury has increased its weekly short-term borrowing by about R2 billion to more than R14 billion a week as of the beginning of last month. This raises concerns about South Africa’s risk premium.
- The South African Revenue Service has indicated that tax revenue is falling short of what was projected in the February budget. Tax collections are R22 billion lower than estimates for the first five months of the current fiscal year.
- National Treasury will present a money-saving plan to cut the number of government departments and state-owned entities to President Cyril Ramaphosa before 1 November 2023. Unions have reacted to government’s current cost cutting measures, urging government to strengthen state institutions and provide support to Eskom to create economic growth and reduce joblessness.
- The Bureau for Economic Research inflation expectations survey shows that average inflation expectations for 2023 fell to 6.1% in the third quarter from 6.5% previously. This suggests that the Reserve Bank’s Monetary Policy Committee might not increase rates when it meets next week.
- Transaction Capital CEO David Hurwitz is resigning as the company warns of poor results. Shares are down more than 88% from their high, falling more than 16% on Tuesday, after the company, which is involved in financing the taxi industry said headline losses to end-September will be far greater than previously predicted.
- Discovery is expecting profits to gain by as much as 35% for the year to the end of June 2023, which resulted in its share price firming by almost 3% on Tuesday. This is despite warning about the impact of higher interest rates on its business.
- JSE-listed AngloGold Ashanti will move its primary listing to the New York Stock Exchange next week, marking the end of an era. The move, from Johannesburg to New York, is to get a richer valuation. Most of its peers on the NYSE trade at a premium of more than 25% to AngloGold.
- As at the time of writing, the rand was 0.3% stronger and the ALSI was 1.7% up for the week.
Sources: Dynasty, BusinessLIVE, The Citizen, News24, Moneyweb, The Independent, M&G, Bloomberg, Reuters, Sky News, CNN, New York Times, Daily Maverick, etc.