Market Musings 02/04/22: Setting Up For Q2 2022

4th Apr '22 by Edmund Shing

16 comments 2137 reads

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Weekly Summary:

Yes, Q1 was tough for nearly everyone…
Can April continue the recovery in stocks?
Market sentiment still low, judging by IPO activity (lack thereof)
Everyone seems to hate European stocks
Getting interesting in precious metals mining
Idea of the Week: GDGB VanEck Gold Miners ETF

1. Yes, Q1 was tough for nearly everyone…

As the chart below aptly demonstrates, only commodity-related investments posted positive returns over the first three months of 2022. All stock and bond exposures lost money to varying degrees. This was in fact the worst quarter for global bonds in over 30 years, as rampant inflation drove bond yields higher (and thus prices lower).

Even cash in a deposit account lost money, at least on an after-tax, after-inflation basis…

Don’t worry if you are down in 2022 so far; only commodities have worked

Source: topdowncharts

2. Can April continue the recovery in stocks?

The table below (for US stocks) highlights that April is statistically the best month of the year on average, in terms of the average monthly return generated and the hit rate (up 74% of the time). This is similarly true for UK and Continental European stocks.

April generally a good month for stocks

Source: topdowncharts

April has historically been even stronger for selected European indices such as the UK FTSE 100 and French CAC-40, gaining an average 2%-2.5%.

UK FTSE 100 index typically peaks at end-April/mid-May

oR_pmxYrEwgqHKGARtPhpWtI5K-4a4n-FJ01sUzV4uDYA-ynerYlPdDY7ZVPK3uhql5EoMmfuAdqJrR3U8--huqMlTq6Ea1nd-lc7uAl83USW07Mqi6Rp137XmOKA_7OaMbCSusP

Source: equityclock.com. Note: 20-year timeframe

3. Market sentiment still low, judging by IPO activity (lack thereof)

After peaking in early 2021 at the time of the peak in tech stocks generally, the number of new US IPO filings has slumped, while the number of withdrawals from IPO processes has surged to the highest since 2009.

IPO activity is a good sentiment indicator; very negative right now…

Source: topdowncharts

4. Everyone seems to hate European stocks

…

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Whitbourne

4th Apr '22

Thanks Edmund, well-written and thought-provoking as ever!

I'm down 6% in Q1 which I guess is not unusual for the Stocko community. Rio Tinto (LON:RIO) is my stand-out winner which supports your analysis re. commodities (though Atalaya Mining (LON:ATYM) and Sylvania Platinum (LON:SLP) have performed less well).

One sub-category that has done well for me is electricity generation and storage - the two that I hold are Gresham House Energy Storage Fund (LON:GRID) and Nextenergy Solar Fund (LON:NESF) both of which are income funds, yielding ~5% and 7% respectively. These are too niche to feature in your table. I wanted to mention them as I have found them rewarding investments, with quarterly dividends projected to rise with inflation. It's a few years away yet, but I can imagine holding these into retirement and beyond.

Revs8

Hi Edmund,

Thanks for the article. Thought provoking as ever.

I checked out the performance of the VanEck Gold miners ETF and it is pretty much moving in line with the price of gold (albeit much more volatile). IMO The gap/lag that you highlighted for HUI Gold Bugs above does not exist with the VanEck Gold ETF so not really comparing apples with apples.

One miner that is lagging the gold price (by a long way) is Centamin (LON:CEY) due to production issues. Can they turn things around and hit previous EPS? Im keeping an eye on the SP.

BnB

Couldn't agree more on the current disdain for European stocks. Yet, as you rightly point out Edmund, many are globally-facing businesses. I am 20% invested in Europe and here's a selection of my top holdings if anyone is interested. Most of them are relatively recession-proof and every one is not just a world-class business, but actually the global number one in their field. Selling for a discount today (although prices can always go lower).

ASML

LVMH

L'Oreal

EssilorLuxottica

Lonza

Sartorius Stedim

Schneider Electric

Atlas Copco

Assa Abloy

Albertos

Thanks Edmund - very informative as always.

You shouldn't have mentioned the N word - Newmont crashing and burning as I type.

When gold and silver miners look good, my poison of choice is £GPM bit small and perhaps too adventurous for some, but does tend to have a good discount (currently @20%) and along the lines of your argument I'm currently in.

Thanks again.

Snowbum

I’m heavily overweight in commodity stocks and up around 15% for the ytd demonstrating the data you’ve shown Edmund. Main exposures are to gold, silver, uranium, potash, oil & gas.

Edmund Shing

5th Apr '22

hi Revs8,

i have to disagree, but only on timeframe... In the short-term, you are correct. However if you look at my chart, the disconnect between gold and gold equities started in 2008! So over the long term, there is a huige gap.

The gold price has largely exceeded its 2011 high level. However GDX (Gold Miners ETF) sits at just over $39, well short of the $67 peak touched in 2011!

^{Hi Whitbourne,}

I agree! Although I have mentioned renewable energy storage infrastructure funds in a recent Market Musings article, if you look back at this year's archive! I like them too, just worry a little about the premia to NAVs that they sit on...

Fair enough Edward,

But I would prefer even more FNV Franco Nevada, as I love the royalty model for derisking the exposure to precious metals prices! Which as you can see, is also a big holding in the Gold Miners ETF, and has been a fantastic performer since 2012...

raggedtp

Agree about premia concerns, Edmund. Not coincidentally, that is why we rotated out of Gresham House Energy Storage Fund (LON:GRID) into Nextenergy Solar Fund (LON:NESF) a few months ago. The former at a substantial premium now people have cottoned on to grid-scale batteries, the latter somewhat boring because 'We know about solar'. Nextenergy Solar Fund (LON:NESF) is still at a small discount.

Agree completely about FNV, 5% position in my SIPP but wish it was more too :-)

Forgot to mention copper in that list.

AJB

I also hold NESF and a small amount of GRID. Interestingly NESF have talked about getting into energy storage of late. They already have the solar assets, grid connections and have leased land they can locate storage on. In theory, I feel they should be able to implement this cheaper than GRID. Despite this NESF is on a 0.81% discount and GRID on a 23% premium!

NESF was also recently trading with a 7.1% yield - compounded this will double your money every ten years, even if the shares don't rerate.

Rusty2

I have exposure to most of those as well, any views on nickel and tin?

I think Tin is driven by the electronics industry owing to its use in circuit board manufacturing so not so sure of the structural demand trend there tbh, with nickel I’m not so keen of late due to the blatant manipulation seen at the LME, the tin & nickel markets are smaller than those for the commodities I mentioned so subject to enhanced volatility.

But as they say, a rising tide lifts all boats so I’d be reasonably confident that investments in the right mining companies would also do well in the coming medium term period.

I think the key is to be particularly choosy about the stocks to hold or to instead gain general exposure via suitable etfs or IT’s.

NeilS

9th Apr '22

Just been reading the September results for Nextenergy Solar Fund (LON:NESF) and £23.5M of their income of £53.4M is from ”Movement in Investment Portfolio value”.

This is really tough to take on board as it’s rather arbitrary, (albeit using discounted cash flow models), it’s still a bit like the buy to let landlords who used to revalue their properties every year to take bigger loans out against them to buy the next property.

What do others think and have I misunderstood? One would expect the older assets to be less technically up to date and less efficient and with correct depreciation surely we would expect the portfolio to be worth less not more?

22nd Apr '22

To my list of global leaders on sale in Europe, I’ve added this week

Fluidra - water treatment for pools and irrigation, attractive valuation for the global no.1

Thule - roof boxes and bike carriers at a modest valuation for the spectacular ROIC

VAT Group - Niche-dominating vacuum valves for semiconductor fabrication. This level of quality doesn’t come cheap unfortunately despite big discount to ATHs.

Hexagon - a cross between Aveva and Renishaw, offering the world’s best portfolio of Industry 4.0 products and services. Still pricey but I can’t resist quality this high.

Market Musings 02/04/22: Setting up for Q2 2022

Podcasts that might interest you:

Weekly Summary:

1. Yes, Q1 was tough for nearly everyone…

2. Can April continue the recovery in stocks?

3. Market sentiment still low, judging by IPO activity (lack thereof)

4. Everyone seems to hate European stocks

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About the Author

Edmund Shing

16 comments

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