Views From the Floor

In this week’s edition - Are online retailers a short?; Marijuana stocks fly high; Is the US pricing in trade wars?

Are Online Retailers a Short?

Within the European consumer sector, there have been a few profit warnings that have caught our eye. Four themes have jumped out at us: 1) There have been significant misses on both the top- and bottom-line; 2) The companies have blamed the extreme weather in Europe; 3) Delivery costs have increased dramatically; and 4) Warehouse costs have also increased.

We believe the increased delivery and warehouse costs could have a significant adverse impact on online retailers.

Marijuana Stocks on a High

Cannabis stocks have been on a tear recently. We believe these stocks have risen due to growing market opportunities, consistent press coverage and regulatory momentum. Figure 1 shows how an index of marijuana stocks, denoted by the Bloomberg Intelligence Canada Cannabis Competitive Peers Index, has performed over the past year, compared with the MSCI World and the S&P 500 Indexes. Indeed, a company that listed on the US stock exchange in July saw its shares soar by about 1160% since inception to September 19, before plunging more than 40% over September 20-21. This is making us question whether marijuana stocks are a bubble waiting to burst.

Figure 1. The Highs and Lows of Cannabis  (%)

As of 18.09.2018; *Rebased to 100 on 19.09.2017

Trade Wars Not Priced Into US Dollar

The trade war between China and the US stepped up a notch on September 24, with the US imposing 10% tariffs on $200 billion of Chinese imports (which could rise to 25% in 2019). China retaliated on $60 billion of US goods. It appears to us that the trade wars haven’t been priced into the US dollar, even if the Federal Reserve rate rises have been. With the talks between US and China cancelled, and with no end to the war in sight, we could see some further weakening of the US dollar.

Figure 2. Further Weakening of US Dollar Is Possible

As of 24.09.2018

Meanwhile, OPEC is so far resisting calls from President Donald Trump to increase production, leading to ongoing upward pressure on the price of crude oil.

Figure 3. Crude on an Upward Trajectory

As of 24.09.2018

Which Way is the Cycle About to Turn?

A typical economic cycle has four phases: boom, slowdown, recession, recovery, according to a long-running research series from Bank of America Merrill Lynch1.  On its indicators, we appear to be at the end of a slowdown phase. 

The bank says that since 1995, there have been only two instances where the end of a slowdown did not result in a stock market recession, but rather went straight back into a boom phase: in 2003 and 2005. The seven other slowdown episodes ended in a recession regime – this does not mean there was an economic recession, but does mean the stock market acted as though there was a recession.

If the current cycle bounces back into the boom phase, we might be inclined to overweight growth stocks and rising momentum and focus on small caps; if it lapses into recession, we might overweight value versus growth, and focus on high-quality and large-cap stocks.

With contribution from: Matthew Sargaison (Man AHL, Co-CEO), Graham Stafford (Man GLG, Portfolio Manager), Boyan Petrov (Man GLG, Portfolio Manager) and Ben Funnell (Man Solutions, Portfolio Manager).

1Bank of America Merrill Lynch; Style Cycle: Sentiment flip-flop, macro tick-tock; 17.09.2018