Investors are fleeing risk. Soon they might regret it
Investors would be mad to take risks in this market, wouldn't they?
As inflation skyrockets and global shares suffer a $13 trillion crash in the worst start to a year since 1932, now is surely the time to play it safe.
It's what most investors are doing. They are piling into the shrinking number of safehaven assets to protect their portfolio from recession and the ravages of stagflation.
After the mania of recent years, it seems like the only sensible thing to do.
Yet taking the risk completely off the table today could be as costly as chasing gains during the latter stages of the bull market.
Because at some point the sell-off will be overdone, and that could deliver a major investment opportunity.
Investors who have gone into hiding will miss it.
The last decade was a thrilling ride for investors, as near-zero interest rates and trillion-dollar stimulus packages drove markets to record highs.
Covid gave share prices a fresh burst of energy, as governments and central bankers fought back with yet another fiscal and monetary blitz.
It was fun while it lasted, although the truth is, none of us really trusted the great stock market bull run.
We all knew what was driving it. Cheap money.
Scepticism grew as late-stage bull market mania took hold last year, and asset prices went crazy.
The S&P 500 delivered an astonishing total return of 30.92% in 2021. Tech stocks ran riot, with the Tesla share price up 1,600% in just 18 months.
Meme stock madness went viral, with struggling video games retailer GameStop soaring 2,400% after private investors ganged up on social media platforms in a bid to take down short-selling hedge funds.
Crypto-currency Bitcoin peaked at $67,734 in November, while the Coinbase IPO, Dogecoin, Elon Musk’s Twitter account, non-fungible tokens (NFTs) and Special Purpose Acquisition Companies (SPACs) added to the froth.
It couldn't last, says Ian Lance, co-manager of Temple Bar Investment Trust. “This sort of mania is never sustainable and more usually associated with the final blow-off stage of a bubble.”
Now everybody is charging off in the opposite direction instead. At some point, they may regret it.
It seems like a good time to play it safe, as inflation hits a 40-year high and central bankers turn hawkish.
Mr Lance says the monetary policies that created the bubble are going in to reverse and puncturing the most speculative parts of the market. “Our feeling is that this is only the start of unwinding of the excesses.”
In place of mania, we now have fear.
The crash is not confined to the stock market, says Symon Stickney, chief executive at asset manager Collidr. “The US dollar is the only major asset class to deliver a positive return in the 100 days after Vladimir Putin’s tanks rolled into Ukraine.”
His figures show the greenback is up 8.5% against a basket of currencies, while gold has fallen 3% in dollar terms (although it's up in euros). US government bonds are down 8% and inflation is savaging the real returns on cash.
Which leaves investors with few hiding places, but should you be cowering in fear anyway?
Markets will always have manic moments, whether shooting up or crashing down, and in both cases it pays to keep a cool head.
Dumping riskier assets is a bad idea now (unless you urgently need cash) and it is too late anyway. All you will do simply crystallise your losses, and lock yourself out of the recovery. Equity investors should not be too downbeat, as growth stocks have enjoyed a “fantastic” bull market, says Mark Heslop, fund manager at Jupiter European Growth. “Given the various challenges humanity faces, the volatility we are seeing in markets is hardly surprising.” Investors should continue to buy shares, but forget passing fads and focus on quality, he says. “We’re looking for companies that have very strong barriers to entry, sustainable competitive advantages and exposure to long-term secular growth as opposed to focusing on near term economic cycles.”
Mr Heslop also suggests targeting businesses with sustainable pricing power, that can pass on inflationary costs to their customers. This gives them the resilience to survive challenging times and even strengthen their market positions.
Stocks are cheaper
Oil, gas and commodities have held firm, providing some respite from chill market winds, says Tom Stevenson, investment director for personal investing at Fidelity International. He says investors should resist the temptation to become more bearish as markets drift lower, because with each dip “the odds of a decent return are improving”.
The bear market may be traumatic but it also makes stocks 20% cheaper. Now is a better time to buy shares than 2021.
Other sectors are also holding firm, notably defence stocks, which are inevitable beneficiaries of Russia's aggression.
China is easing its Covid lockdowns and driving through “significant fiscal support measures”, says Gergely Majoros, a member of the investment committee at fund manager Carmignac.
He says investor sentiment is rising as Beijing eases its brutal crackdown on the tech sector, which wiped hundreds of billions of dollars from the share prices of giants such as Alibaba and Tencent.
Valuations look “attractive" and many investors are underexposed, Mr Majoros adds.
Brazil, Mexico, Argentina and Colombia are key exporters of oil, metals and grains, which offer sought-after protection against inflation, says Charles Jillings, manager of Utilico Emerging Markets Trust. “These economies are expected to benefit from inflationary pricing for commodities, boosting the region.”
If you’re feeling brave, now may even be a time to take a few risks.
While the Fed is set to hike rates further, it is likely to stop the moment that this tips the US into recession. When that happens, investors will rediscover their appetite for risk. It could happen faster than you think.
Those who invest before this happens rather than afterwards should reap the biggest rewards. This could even apply to Bitcoin, the ultimate risk asset. Its sell-off has been brutal, but it has been here before.
In November 2020, investment boutique Ruffer invested $744 million in Bitcoin as “an insurance policy against the continuing devaluation of the world's major currencies”.
By April, it has completely exited its position, after banking a quick (and unexpected) profit of more than $1billion.
Last year, Ruffer investment director Duncan MacInnes said that at the heart of any mania there is a kernel of truth.
Bitcoin felt like the 1990s tech stocks madness. “A lot of crazy things happened in the dot.com bubble, but the internet did change the world, the promise was fulfilled,” Mr MacInnes says. US tech titans like Apple and Amazon have also changed the world. The blockchain may have its moment, too.
While Bitcoin may be too big a risk for many, today's bear market is already throwing up opportunities.
It’s time to stop hiding and go looking for them.
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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