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To what extent can the latest trends affect the market?

10 August 2018

Sentiment and fashion can drive markets, but we should be wary of the extremes this can generate. Ultimately, the price of anything is completely subject to supply and demand. Take the 1962 Ferrari GTO, one of only 36 made, as a very simple analogy of this. Later this month, this car is due to be sold at auction and is estimated to fetch $45-60 million. If two buyers want it, bids may push higher. Very few of this desirable model were made and there are plenty of the super-rich who like classic cars, so consequently demand outweighs supply. 

In the art market, top quality works continue to find buyers, meanwhile modern art is outstripping everything else.  There are reports that a piece of work by David Hockney has been offered for sale at $80million, a record for a living artist. However, the picture is not so rosy elsewhere for 'non household' names. Whilst art, cars and antiques do in some cases have investment potential, this is generally not considered the reason behind their value. 

At the bottom of the market after the financial crisis, pessimists predicted "equity markets were dead, no one will buy them again". Equally, in 1999 when the dot-com bubble was at its heights, I was frequently asked why bother with bonds when equites were the best performers. These were moments of extremes in sentiment and in both cases, the sentiment was wrong. In the tech bubble of 1999/2000 anything that had dot com in its title or could be linked to the internet could find a buyer. As a bond investor who looked at interest rates, I found it hard to understand. I remember arguing that the internet would bring makers and buyers closer to cutting out the middleman, this did not make more money for the market as a whole. In fact, it could reduce the profitability of the market as a whole, but different people would be making money. This remains the case; House of Fraser, one of the latest in a long line of retailers, is on the verge of going out of business while Amazon rides high. 

There has been talk of another tech bubble with some US tech stocks climbing dramatically. However, this time there are real numbers to back it up. Apple's market capitalisation passed $1trillion last week, which appears to be an enormous number but with around $50billion in net profit over the last year, $60billion in share buy backs and $13billion in dividends there are real returns supporting the share price. In this case, it is not so much a fashion as a belief in their ability to continue at this level of profitability. We also have to be wary of looking at the sector as homogeneous. The drivers of returns on Apple are very different to Alphabet (Google - to most of us) and Facebook who depend on advertising revenue. Thus, we look at each company on its own merits and suggest a selective approach to the sector.

As far as modern art and classic cars are concerned, prices may continue to rise but they depend on at least two buyers after the same object. We should not forget that two bidders pushed a Leonardo da Vinci painting, the quality of which was disputed, to $450million. While I enjoy art and cars, when it comes to investments, I prefer to look at income streams and assets less driven by the fashion of the day.



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