- Snap IPO the biggest non-event of 2017
- Robotics and automation could be overextended
- Survey results could mean-revert in Q1'18
What were the year's key events in the equities space? Photo: Shutterstock
TradingFloor.com: What was the biggest event of 2017?
Peter Garnry: We will spin this and say the biggest event was that all financial markets saw realised and implied volatility collapse to all-time lows despite the US electing the most volatile president in modern history.
One year ago, the consensus bet on Wall Street was more volatility and stronger investor sentiment due to big reforms in the US under the new president. Volatility went away, however except for a small blip over North Korea, and investor sentiment grew increasingly strong despite the lack of no new meaningful bills in the US.
TF: What was the biggest non-event?
PG: North Korea is the obvious choice on macro as markets didn’t care in the end... and also read the situation correctly. The situation is gridlocked with the US paralysed and not acknowledging that the only solution involves the US army retreating from the Korean peninsula.
In equities, the biggest non-event was Snap, the year’s most-hyped US tech IPO, as expectations were inflated with Snap presented as the next big thing in social media and a real threat to Facebook.
It all turned out to be wrong, at least in the short term, with user growth stalling and advertisers holding back due to an inadequate advertising platform. Shares are down 5% from the IPO price and down 33% from the opening price on Snap's first day of trading.
TF: What was the year’s most overvalued asset?
PG: All cryptocurrencies are the obvious choice on a top-down view with price behaviour going super-exponential in the later part of 2017. In equities, robotics and automation stocks are likely becoming overvalued with an impressive 47 % return this year as investors suddenly couldn’t get enough of this new theme.
The rally has pushed the industry to a 35% premium over global equities, but with only around a 6% expected growth rate in revenue, the question is whether investors are getting a bit ahead of themselves.
Robotics and automation will be big and important but we are still the early stages when measured in terms of long-term global penetration.
TF: What was the year’s most undervalued asset?
PG: I think airliners have been the surprising event in equities. The industry is up 37% including dividends reinvested which is 13 percentage points more than the global equity market.
Despite a rise in oil prices, demand and favourable pricing in most regions have lifted profit growth and the International Air Transport Association recently issued a very positive outlook for 2018 on the airline industry.
The industry still trades at a 50% discount to global equity markets, so it remains relatively cheap.
TF: What’s the next major thing on the calendar?
PG: With investor sentiment being extremely strong as we end 2017, the key things to watch before Q4 earnings start up in February are inflation and surveys (PMIs, business and consumer confidence).
Inflation pulled a no-show yet again and the market has agreed that unless it arrives, the Federal Reserve will have to lower its rate projections for 2018 which could be additional fuel for equities.
Most surveys are at 10- to 15-year highs and these indices are inclined to mean-revert, so our theme is that we will soon begin to disappoint against expectations and that will cause a minor setback in equities sometime in Q1, possibly as soon as late January.
After a great deal of media hype, Snap Inc. shares gave up the ghost
after the social media firm's IPO. Photo: kenary820 / Shutterstock.com
— Edited by Michael McKenna
Peter Garnry is head of equity strategy at Saxo Bank