Stocktake

The World Cup begins next week, and the winning country can hope to enjoy a market boost, with Goldman Sachs finding a "clear pattern of outperformance" in the weeks after the final.

Since 1974, the winner’s stock market beat global indices by an average of 3.5 per cent over the following month.

The pattern is consistent, the one exception being in 2002, due to Brazil’s financial woes.

In 2010, however, Spain did shrug off its financial concerns, the Ibex rallying 5.7 per cent in the month after its World Cup victory.

It’s a different story for the runners-up, seven of the last nine losing finalists subsequently underperforming, with an average relative decline of 5.6 per cent over the next three months.

The "honeymoon bounce" does not last, however, and the winners – Goldman's models indicate Brazil has a 48 per cent chance of winning – actually underperform by 4 per cent in the year following the tournament.

“Sentiment can only take you so far,” said Goldman. “Enjoy the gains while they last.”

Apathetic investors unmoved by highs

New bull market highs are meant to be a cause of excitement, but recent action has been like watching paint dry.

The spread between the S&P 500’s high and low over the last three months has been below 5 per cent, a level unseen since 2006 and way below the average (13.2 per cent) of the last three decades.

Volatility in equities, bonds and currencies is some 30 per cent below the average of the 2004-2007 period.

The S&P 500 is up 3 per cent in 2014, the Dow 1 per cent. The Nasdaq is flat. Only twice in the last four decades have all three indices been up or down less than 3 per cent at this time of year.

All-time highs are not exciting retail investors, a recent poll finding 43 per cent had a neutral market outlook – the highest reading in a decade.

Traders might complain, but it augurs well for further gains, given bull markets are meant to end in euphoria, not apathy.

Investor polls, additionally, indicate money remains on the sidelines, potentially fuelling further gains.

Lousy finances, great stocks

The worse your finances, the better your stock.

Bloomberg last week noted Goldman Sachs data showing stocks with the poorest balance sheets have climbed 94 per cent since the end of 2011, almost twice the S&P 500's gain.

The 50 worst companies rose 50 per cent last year, with outperformance continuing into 2014. The riskiest companies, those issuing junk bonds, have also gained nearly double that of the market over the past year.

Investors believe an improving economy will justify their faith, and say the strongest companies already trade on very high earnings multiples.

The worst firms, however, now trade on 21 times earnings. That’s not cheap, and makes the recent action seem, at best, imprudent.

Bargains appear in Japan

Global indices continue to edge higher and look ever pricier, but Japan's Nikkei has been a notable exception. With last year's star performer down 10 per cent in 2014, might there be opportunities for bargain hunters?

Yes, says Société Générale.

The number of Japanese stocks meeting its deep value screen has spiked upwards, in contrast to Europe, where the number of obvious bargains has collapsed since equities took off in mid-2012.

Things are even worse in the US. There, the deep value screen registered upward spikes during corrections in 2011 and 2012 but now, hardly any bargains exist.

Add in potential for more central bank action in response to the “lacklustre” impact of Abenomics (named after Japanese prime minister Shinzo Abe, pictured), says Soc Gen, and Japan looks more tempting than “simply continuing to pay over the odds for more expensive US and European equity names”.

Leveraged ETFs spell danger

Leveraged exchange-traded funds (ETFs) could potentially "blow up" the industry, Blackrock's Larry Fink warned last week.

Whatever about that, these increasingly popular but misunderstood trading vehicles could certainly damage investor portfolios. Leveraged ETFs magnify an index’s daily gains or losses. If, say, the S&P 500 rose by 1 per cent, its triple leveraged counterpart would rise by 3 per cent. One can also buy inverse ETFs, which move in the opposite direction of the index they track.

Short-term traders can effectively trade on margin, getting access to the market action they seek.

However, many medium and long-term investors are also using them to juice returns, not realising leveraged ETFs are not designed for this.

US regulators previously gave the example of one index that rose 8 per cent between December 2008 and April 2009.

However, an ETF aiming to deliver three times the daily return of the index fell 53 per cent.