Chipmaker ASMI: Up 74 percent since the beginning of the year. Big brother ASML: 68 percent. Steelmaker Arcelor Mittal is up 60 percent, followed by another chipmaker, BESI, with 53 percent. And fifth in the top-performing major Amsterdam listed funds is ING, with an increase of 52 percent since 1 January. A little further on: light maker Signify, chemical and nutrient distributor IMCD, two publishers (Wolters Kluwer and RELX) and chemical company DSM.
Share prices are doing well. But, perhaps even more significantly, almost all share prices are doing well. Cyclical funds are doing well, as are many ‘defensive’ funds. growthequities, of companies with high growth expectations, are performing very well. Value-stocks, which have to suffer from (initial) undervaluation, too. Sure, they’ve sometimes traded a dime in the attention of investors this year. But anyone who takes stock at the end of the summer of 2021 must conclude that the rising tide has lifted most of the boats on the stock exchange.
The result is that the stock market index, the AEX, climbed above 700 points again at the end of March for the first time since 2000. That the old record could hold for so long is partly due to the composition of the index at the time, when the prices of tech and media-related funds exploded – and then completely collapsed. But the AEX is now also floating on the waves of the favorable international stock market climate. If only because the listed companies participate fully in the international economy and also have international investors. Steel company Arcelor Mittal hardly has any significant activities in the Netherlands. ‘Our’ blast furnaces at Wijk aan Zee belong to that other Indian steel giant, Tata.
Also read: Twenty years after the dotcom bubble, the time has come: the AEX record is falling
Deep black scenarios
In the meantime, the AEX is stringing together records almost daily, as is the case with price peaks. This week, the index crossed 775 points. And much of the rest of the West is little different. Paris, Frankfurt and Milan hit records. In New York, this applies to the Dow Jones, the Standard & Poor’s 500, the tech-heavy Nasdaq index.
The increase is partly due to the course of the pandemic. When the prices collapsed in March last year, it was based on deep-black scenarios for the economy. The world has had no recent experience with a virus that is spreading so globally. The rapid roll-out of effective vaccines and massive economic aid packages, during the pandemic itself and for the recovery afterward, kept the dark future from coming. The economy appeared to be performing remarkably well, although some international production chains of companies occasionally suffered. The AEX index briefly fell below 400 points on March 18, 2020. To illustrate the recovery afterwards: the heavy stock market fund ASML, which does not just get investors very far from its place, closed that day below 182 euros. This Wednesday, barely a year and a half later, the fund was around 670 euros.
The economy itself is a major factor in rising prices, but the most important factor is interest rates. The amount determines how attractive equities are compared to other investments (government bonds, for example, or savings). The interest rate determines how profitable professional investment strategies that are executed with borrowed money. And the level of the interest determines the financing costs of listed companies themselves, and their profitability.
The low, and sometimes even negative, interest rates of recent years are partly due to the economy itself. High savings, partly due to an aging population, but also due to rising prosperity in countries such as China, are pushing interest rates everywhere. Central banks also play a major role. They keep interest rates low, both short-term and long-term.
Low interest rates mean that the value of almost all assets is being pushed up. Real estate prices, especially housing, are rising everywhere. Not only in the Netherlands, but also in the rest of Europe and in North America. Professional investors who have scoured all other markets in search of the last remaining yield have now set their sights on residential properties. These are now massively bought up for rental not only in the Netherlands. There is a whole political battle raging in Berlin right now, with the question of whether the new large investors cannot be expropriated.
The value of tradable loans has also risen. This can be seen in government bonds, which are also bought up by the central banks. The higher their price, the lower their return. For example, the price of Dutch and German government bonds has risen so much that the ‘effective’ interest rates on those loans have become negative. In the meantime, there has been such a run on loans from even the most shaky companies that the interest on these ‘junk’ loans has plunged below 4 percent in Western financial markets.
Close to the dotcom bubble
Of course, this trend does not go unnoticed by share prices. Rarely was more paid for shares than now. Two classic benchmarks are now far in the red. The first is Q, which the later Nobel laureate James Tobin developed in the 1960s. Simply put, Q indicates whether companies on the exchange are being paid more or less than it would cost to build them from the ground up. Q now stands at a record of 2. Criticisms of the measure include, among other things, that it takes too little account of intangible assets (eg patents, or goodwill paid in acquisitions). That is possible, and such intangibles have started to play a greater role over time. But it does not alter the fact that Q is currently far above the values that have been common in the past century since 1900.
The second classic measure comes from another Nobel laureate, Robert Shiller. This is a simple price-earnings ratio for the entire stock market, where the prices are divided by the earnings per share. What is new is that at the end of the 1990s Shiller took the average profits of the past ten years, in order to neutralize the influence of the economic climate. Shiller’s Cyclically Adjusted Price to Earnings Ratio (CAPE) became famous for foreseeing the bursting of the dotcom bubble leading up to 2000. This benchmark has also been recalculated to the beginning of the last century. He has not yet reached the value of just before 2000, but the stock markets are close.
The future ahead
Does this mean investors should get away from the stock market? The extremely low interest rates make comparisons difficult, and central banks do not tire of assuring that they will remain low for the time being – or will rise very gently and predictably. But the prices are very much ahead of the future. The promises that have now crept into the stock market valuations must be fulfilled. Who knows, it will go very slowly. Many professional investors are beginning to count on an era in which their returns will remain relatively low, until all those promises in the stock prices are actually fulfilled.
Also read: Is the stock market crashing? Do not trust yourself as an investor
An alternative is that the prices suddenly return from a dreamed golden future to the reality of today. The question is whether central banks will allow this to happen. The consequences of a stock market crash in an economy still with one foot in the pandemic would be disastrous.
So the roles seem reversed. For as much as investors tremble at the central bankers, the latter now threaten to become the captives of the stock markets themselves; a monetary variant of the Stockholm syndrome. In that sense, it is quite appropriate that the Swedish stock exchange on Wednesday on a all time high ended up.