Be careful of stepping into trouble when market fundamentals are still so shaky
Yogi Dewan is CEO and founder of Hassium Asset Management.
Many investment houses are again forecasting a bull market in 2021.
Whilst I am neither bullish or bearish this feels like an accident waiting to happen. Whilst we remain positive near term, markets now look very overvalued and very overbought. Investor sentiment seems once again to be ignoring market fundamentals.
It is focused more on vaccine news and the post-Covid reflation trade off a very low economic base. We are mindful that markets are ‘priced to perfection’ – if key events disappoint around vaccine distribution and efficacy, corporate earnings, Brexit trade agreements, fiscal stimulus plans, and or monetary tightening due to inflation, then markets will trade lower.
Although markets continue to hit all-time highs, with many investors worried about being out of the market, we remain cautious and sceptical of the overly optimistic market forecasting investment banks continue to sell.
Read more: Senior politicians urge HSBC to unfreeze accounts of Hong Kong activist Ted Hui
More broadly, accommodative short term interest rates will not be low forever. Stimulus packages will eventually have to be paid for. Retail trading versus hedge funds is short term and speculative in nature with recent events around GameStop highlighting how dangerous the trading environment can be. There is a worrying sense of irrational exuberance (once again) in the air.
Many retail investors and some hedge funds have lost a lot of money. Longer term the impact of very high unemployment on sentiment and corporate earnings cannot be underestimated. Bank lending also remains subdued and stimulus plans will eventually end, both critical for future economic growth.
The drivers for future earnings growth look very fragile.
Earnings expectations for 2021 look too high with revenues forecast to grow by + 9 per cent and earnings forecast to grow by +24 per cent. These numbers are misleading as they are coming off an historically low base.
Corporate earnings that beat expectations are being sold quickly into the market by traders and speculators. The technology sector looks like a very overcrowded trade dominated by a handful of players and is unlikely to continue at the same pace it has over recent years. The reflation trade focused on value and cyclicals looks more sensible. Emerging market exposure also looks like a reflationary beneficiary for longer-term investors.
The right mix of equity exposure will be more important than ever in 2021. We are ensuring that our clients protect gains made over the last two years. Much of this has come from both equities and bonds despite the Covid-19 backdrop. Asset allocation and currency allocation will be the biggest driver of performance.
We are marginally underweight in higher-risk assets and are looking to reduce equity exposure further into Q2.
The idea is to avoid panic or forced selling at depressed levels when volatility is high, or the fundamental backdrop has changed.
Long term investors should stay focused on liquid investments. Avoid utilising leverage to trade and speculate, this includes hedge fund exposure and Bitcoin. Stay diversified across all asset classes and sectors. Avoid concentrated equity exposure particularly in the overvalued technology space. It is also important to avoid the recent retail trading frenzy which has ended in tears for many investors.
It is difficult being out of the market after recent market gains, especially with bond yields and cash rate so low. Our ethos is to preserve and grow wealth and we would rather accept lower returns in 2021 than lose money when the fundamental backdrop looks so uncertain.