Market Musings 13/09/20: Where is the market strength today?

Where is the market strength today?

The leading market in the world, the tech-heavy Nasdaq index, has continued to consolidate lower after its 75% run-up from the late March lows. Technology is a tricky sector to invest in right now, as the momentum stocks like Tesla, Amazon and Microsoft continue to show weakness in the short-term.

I think Technology is probably still a good place to invest for the long-term, if you can find pockets of “value”, however you choose to define that in a high-growth technology stock.

However, this consolidation of technology momentum might take some time still, so it might instead be worth looking elsewhere for pockets of strength in global stock markets. But where are they?

Country indices: Germany, Sweden lead the way in Europe

At a country level, the strongest stock markets from a momentum standpoint remain the German DAX index (in blue) and the Swedish OMX index (in purple). Both continue to mark a strong recovery from the March lows, powered ahead by the strong industrial cyclical sector exposure.

DAX and OMX 30 indices are clearly outperforming the rest of Europe

In the UK, one can buy exposure to the DAX index via the XDAX ETF (in GBP), an Xtrackers ETF that carries a very low annual expense ratio of just 0.09%.

Sector indices: Autos, Industrial Goods, Chemicals

As I said, these two stock markets are dominated by industrial cyclical sectors, including Autos and Capital Goods. Unsurprisingly then, these two European sectors (Autos in blue, Industrial Goods & Services in orange) have outstripped the STOXX Europe benchmark index substantially since March.

Autos and Industrial Goods & Services sectors lead in Europe

At a stock level, the Autos company with the strongest price momentum is Daimler in Germany, while the strongest momentum in Industrial Goods & Services can be found currently in PostNL in the Netherlands and Deutsche Post in logistics, and Luceco (LON:LUCE) in the UK in LED lighting.

iShares offer sector ETFs that replicate the main STOXX Europe Autos sector (EXV5) and the STOXX Industrial Goods & Services sector (EXH4), both quoted in euros and listed in Germany.

But in actual fact, the European sector with the strongest momentum at present is neither of these, but the Chemicals sector (in blue) - led by high quality subsectors with global oligopolies in the form of Industrial Gases (think Linde, Air Liquide) and Flavours and Fragrances (think Givaudan, Symrise and Treatt in the UK). This sector today combines exposure to the global economic recovery together with high profit margins due to their effective oligopolies, supplying the global electronics, industrial and health care sectors in the case of gases, and the global luxury goods (perfumes) and food & beverages sectors in the case of flavours and fragrances.

European Chemicals are in a sweet spot

Commodities: Look to Palladium, Copper

I have professed my long-term bullish views on precious metals, most notably gold and silver, in part weeks. However, for now these “hard” currencies are consolidating around the $1940/oz and $27/oz levels respectively at present. But commodities as an asset class are showing signs of life apart from these two precious metals, most clearly in copper and palladium.

In the case of palladium, this is interestingly linked to the pickup in car sales, as one of the principle industrial uses for palladium is in car catalytic converters. In the case of copper, this perhaps reflects the economic recovery in China, which is responsible for fully 50% of the marginal demand for this economically-sensitive base metal.

Copper and Palladium lead the way in the commodities complex

Wisdomtree offer ETFs to invest in physical palladium PHPD and in copper, COPA . Note that both are denominated in US dollars.

Otherwise, UK-listed companies with exposure to palladium include Sylvania Platinum (LON:SLP) , and Antofagasta (LON:ANTO) Kaz Minerals (LON:KAZ) and Central Asia Metals (LON:CAML) for copper exposure. Even Rio Tinto (LON:RIO) contains substantial exposure to copper, although Rio Tinto remains a global diversified miner with substantial exposure also to other base metals with strong upwards momentum such as iron ore.

Disclosure: I own shares in Sylvania Platinum

Chinese iron ore futures have rebounded strongly since March

Gold & Silver breakouts

Even while the gold and silver prices remain in a holding pattern for the moment, there are gold and silver stocks that have broken out to new multi-year highs in spite of the lack of leadership from the metals themselves.

They are no doubt being boosted by the Brexit-related depreciation of the pound sterling against major currencies including crucially the US dollar, since these precious metals miners tend to report in US dollars and are of course based pretty much 100% overseas.

Two such stocks that have popped up on my momentum radar screen are the African gold miner Shanta Gold (LON:SHG) and the Latin American gold and silver miner Fresnillo (LON:FRES) .

Shanta Gold and Fresnillo forging new price highs last week

Dislosure: I own shares in Shanta Gold and Fresnillo

Remember, please Do Your Own Research, as I do not give stock recommendations, but merely suggestions for further investigation!

Have a great week ahead,

Edmund