Are markets too complacent? Eye the consensus with caution – Graham WainerPublished on 18 Dec 2020
View from the CIO
Covid continues to wreak havoc across the world and will have long-lasting implications for all spheres of human activity. It seems, however, that the end is in sight. Good news both for markets and – more importantly – for society at large. The result is that the consensus for risk assets is very bullish. Compared with where we have been, an optimistic outlook is welcome but this doesn’t mean investors shouldn’t exercise appropriate caution over the coming months.
Investors will never forget 2020. Since February, markets have moved first from denial – when investors ignored the news assuming we were looking at another SARS – to despair, when they realised we weren’t. Then markets totally overreacted to this, with investors selling everything down to treasuries and gold. Panic was replaced by a phase of extraordinary recovery as governments moved with record speed to cut interest rates and throw money at the system. The subsequent good news around vaccines and the US presidential election was exactly what the market needed to further aid recovery. Since the beginning of November, everything has rallied, none more so than the laggards – the value stocks like financials, energy and hotels. On the face of it, the market has every reason to be bullish.
Yet it is precisely this overwhelmingly bullish consensus – this complacency – that investors should be wary of. Although historically the consensus has been quite good at predicting, virtually every market indicator has a ‘green light’ and arguably everything is ‘in the price’ already. The market therefore needs more than the good news it has already to carry it forward; it needs additional good news. What that additional good news might be, though, is not immediately obvious.
Those that call for caution warn of the dangers of putting too much faith in the vaccines. Will they be less effective than hoped? There are also those who warn that it will take years to roll it out effectively. They are the same people, however, who said it would take many years to develop a vaccine when in fact it is has been a fraction of that. We should also expect the scars of the recession, hidden to a large extent by government support, to reveal themselves in the new year. We need to keep a watchful eye on the trend in bankruptcies and unemployment. Neither is continued stimulus guaranteed if the economy normalises.
Cautious optimism would seem to be the order of the day. Although there is every reason to remain positive about a return to a new normality in 2021, investors must think with their heads not hearts over the coming months, staying engaged but ‘tuning’ portfolios to keep an eye out for genuine investment opportunities.
Graham Wainer is CEO and Head of Investments at Stonehage Fleming Investment Management in the UK. He is also Chairman of the CIO Group.
Read more by Graham