In October, we wrote about the market opportunity in biosimilars, which are generic versions of biologic drugs, also known as biologics. Biologics are molecules made by living organisms such as humans, animals, and microorganisms, which mean they typically have a more complex molecular structure compared to conventional drugs. These drugs can treat a wide variety of diseases and potentially see greater efficacy versus other therapies.
To hedge or not to hedge currency risk, that age-old question for international equity investors just keeps popping up. Admittedly, for U.S. dollar (USD) investors allocating to international equities, this has been a futile exercise as prolonged USD weakness has provided a nice tailwind to returns. However, the period from 2014 through 2016 was a wake-up call for the unhedged investor; ignoring currency risk was no longer acceptable. While international stocks performed well at the local level, currency risk devasted those returns as they were exchanged back into USD.
Here is some potential good news and some potential bad news. The good news – international stocks are not expected to implode anytime soon. The bad news – a correction of 5-10% seems fairly likely. This increasing probability of a near-term correction is supported by the diverging relationship between stock prices and macroeconomic data.
“How Much Should We Trust the Dictator’s GDP Estimates?” Continuing our unhealthy obsession with satellite imagery, this question is the title to an intriguing academic paper written by Luis Martinez of the University of Chicago. In this working paper, he studies the manipulation of GDP statistics by the more authoritarian regimes around the world. Cleverly, he utilizes satellite imagery to measure the level of nighttime lighting as a means of validating the reported economic numbers. Shout out to the Washington Post for bringing this to our attention.
Topics: From the Desk of Harry Polishook
Fund flows in 2017 massively favored passive investment strategies with a total of $692 billion flowing to passive funds. (Read our blog 2017 Fund Flows: Passive Trumps Active (Even In International Equity)). While international equity strategies saw positive inflows to tune of about $230 bn, actively managed funds only saw about $30 bn of positive inflows.
The market is paying close attention to a critical 3% level for U.S. 10-Year Treasury bonds, which has implications for both domestic and international securities. Excluding utilities, sectors traditionally seen as stable sources of yield have recently underperformed, including consumer staples, REITS, and telecom.
Are geopolitical risks beginning to impact stocks? While 2017 was marked by low volatility and little consideration for risk in general, the first quarter of 2018 feels different.
Imagine you have some great recipes for butterscotch cookies, and you want to start a cookie business. Yet, there are some issues. First, the price people are willing to pay for cookies is going down due to intense competition as well as scrutiny from regulators after a few greedy companies ("cookie monsters," if you will) charged exorbitantly high prices. Second, because of the competition, you'll have to spend more on research to keep your cookie line fresh (pun intended). Finally, building a cookie factory is expensive, takes years to build, and requires following many stringent regulatory standards. The thing is, cookies are still in demand and could even get more popular as better cookie recipes are developed! So what do you do?
One of the more interesting developments in the oil markets is the fact that oil inventories have not had their seasonal build. We don’t blame you for not noticing. This news was likely drowned out by all the macro “noise” around trade wars, flattening of yield curves, rise in inflation, tax reform, new Fed Chair (hawkish or dovish?), spike in VIX, and volatility in FANG stocks. Admittedly, there is a lot of macro news to digest.
Continuing with our explorations of cryptocurrencies and blockchain technologies, we highlight a fascinating risk of supporting a cryptocurrency.
Topics: From the Desk of Harry Polishook