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Does Wall Street fail the Gordon Gekko test?

by LLB Reporter
19th Nov 21 11:22 am

Gordon Gekko, the insider-trading corporate raider of 1987’s Oliver Stone film Wall Street, may have been a villain but that did not stop him talking a degree of sense, especially as he warned quite clearly ‘The mother of all evil is speculation.

Quite what Gekko would have made of today’s markets can itself be only a source of guesswork, but he would have surely blanched at the price tag now afforded to electric vehicle maker Rivian and the bubbly nature of many stocks and even entire asset classes.

A $100 billion-plus market cap for such a young company as Rivian Automotive offers little or no downside protection should anything unexpected go wrong, whereas investors can potentially find a better balance between downside protection and upside potential by seeking out something which may be unloved and therefore undervalued.

“In this context, the last ten years’ underperformance by emerging market equities relative to developed one catches the eye,” said AJ Bell Investment Director Russ Mould.

“This can be seen by simply dividing the value of the FTSE Emerging by that of the FTSE Developed Index. If the line rises, Emerging Markets are outperforming and if it falls then Developed arenas are doing better.

“Developed Markets ended the 1990s on a high as the Asian and Russian currency and debt crises hammered Emerging Markets, only for them to recover just in time for the technology bubble bust to hobble the Developed ones for the best part of a decade. It has been one-way traffic since 2010, however, as Developed Markets have proved to be the better portfolio pick by far.

“The questions to ask now, therefore are ‘why?’ and ‘what could change’?

“One good guess as to the reason for the performance disparity would be the sector mix of the indices. But they are not as different as investors might think. There is a similar representation in technology and the percentage weighting toward cyclical sectors such as financials, industrials and consumer discretionary. Emerging markets’ greater weighting toward financials in a margin-crushing, zero-interest-rate environment may not help, and nor may the higher weighting toward energy and basic materials (mining) during a low-growth, low-inflation decade, but neither looks conclusive.

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