Investment Insights -
The market playbook
As the world braces for a potential second wave of infections from COVID-19, shares are pricing in a booming global economy and currency volatility is rising. As we have discussed previously, willingness to be positive and forward-looking in part reflects the ‘bazooka’ efforts by governments to backstop the economy. Furthermore, central banks have adopted a strategy that works like a one-way ratchet, providing a floor for share prices but never a ceiling.
This backstop has unintended consequences. Citi’s chief equity strategist asked in a recent research report whether the market was “Getting Bubblicious”, as Citi’s closely followed Panic/Euphoria index reached its most euphoric level since 2002.
But perhaps most dangerous is the euphoria coming from retail investors via emerging platforms, such as Sharesies in New Zealand and Robinhood in the United States. These trading platforms provide an entry into day trading for a large, usually younger population of otherwise inexperienced investors. Sharesies’ customer base increased by 75,000 to 166,000 since the onset of COVID-19.
Short-term speculation on share markets, with little thought towards an investment strategy, diversification or risk profile, means some retail investors are investing akin to betting at the casino. This is evidenced by the share prices of some highly volatile and troubled companies being pushed higher by retail investors. The winning streak will come to an end and with it the wealth of many thousands of inexperienced speculators will decline in lockstep.
Get rich quick vs the professional investor
International shares are now valued at more than 19 times next year’s earnings. These kinds of levels have not been seen since the dot-com bubble burst in 2002. This is of concern as it comes as millions of people are cast into unemployment while the economy contracts.
One of the curious features of this market has been the purchasing of shares of bankrupt companies, including car rental company Hertz which recently received unprecedented permission to sell additional shares to investors, despite the very real risk that the value of those shares could plunge to zero.
Air New Zealand, meanwhile, remains severely challenged by COVID-19, given border closures and the adverse impact on passenger demand. Cash losses and asset impairments will materially deplete its net asset value while management themselves believe the airline will be 70% of its former size in two years’ time. Yet the shares trade at a level seen prior to the crisis.
Currency’s volatility
Swings in foreign exchange are picking up again – another sign that investors cannot decide between fear over a second wave of infections and optimism that economies are starting to mend. Nowhere has this been more evident than the New Zealand dollar, which plunged to an 11-year low in March then rebounded 16.5% in the space of three months.
How we are investing in a euphoric market
It is easy to find people with investing ideas; talking heads on TV, or a ‘tip’ from your neighbour. But these ideas are not a replacement for a thoughtful investment strategy that can help clients achieve their financial goals. NZ Funds believe clients should have a mix of assets diversified across different geographies and sectors.
At NZ Funds, financial advice is at the forefront of constructing our clients’ portfolios. For example, a typical 0-54 year old KiwiSaver client holds an incredibly diverse mix of assets, including New Zealand shares, global shares, hedge funds, alternative assets, New Zealand bonds, global bonds, commodities, gold, currency and downside mitigation. It also includes themes such as digital transformation, rideshare and dividend yield.
The goal of diversification is not necessarily to boost performance. It will not ensure gains or guarantee against losses. Diversification does, however, have the potential to improve returns for whatever level of risk a client chooses to target. The current concerns around the ‘real’ economy means the market is set for more violent moves both up and down, especially as a second wave of COVID-19 takes hold in some countries.
Whatever the market brings over the next one, three or five years, knowing your portfolio is constructed to reflect your personal circumstances and invested by a professional means you can continue to build a robust, sustainable portfolio that generates significant wealth over time.
This backstop has unintended consequences. Citi’s chief equity strategist asked in a recent research report whether the market was “Getting Bubblicious”, as Citi’s closely followed Panic/Euphoria index reached its most euphoric level since 2002.
But perhaps most dangerous is the euphoria coming from retail investors via emerging platforms, such as Sharesies in New Zealand and Robinhood in the United States. These trading platforms provide an entry into day trading for a large, usually younger population of otherwise inexperienced investors. Sharesies’ customer base increased by 75,000 to 166,000 since the onset of COVID-19.
Short-term speculation on share markets, with little thought towards an investment strategy, diversification or risk profile, means some retail investors are investing akin to betting at the casino. This is evidenced by the share prices of some highly volatile and troubled companies being pushed higher by retail investors. The winning streak will come to an end and with it the wealth of many thousands of inexperienced speculators will decline in lockstep.
Get rich quick vs the professional investor
International shares are now valued at more than 19 times next year’s earnings. These kinds of levels have not been seen since the dot-com bubble burst in 2002. This is of concern as it comes as millions of people are cast into unemployment while the economy contracts.
One of the curious features of this market has been the purchasing of shares of bankrupt companies, including car rental company Hertz which recently received unprecedented permission to sell additional shares to investors, despite the very real risk that the value of those shares could plunge to zero.
Air New Zealand, meanwhile, remains severely challenged by COVID-19, given border closures and the adverse impact on passenger demand. Cash losses and asset impairments will materially deplete its net asset value while management themselves believe the airline will be 70% of its former size in two years’ time. Yet the shares trade at a level seen prior to the crisis.
Currency’s volatility
Swings in foreign exchange are picking up again – another sign that investors cannot decide between fear over a second wave of infections and optimism that economies are starting to mend. Nowhere has this been more evident than the New Zealand dollar, which plunged to an 11-year low in March then rebounded 16.5% in the space of three months.
How we are investing in a euphoric market
It is easy to find people with investing ideas; talking heads on TV, or a ‘tip’ from your neighbour. But these ideas are not a replacement for a thoughtful investment strategy that can help clients achieve their financial goals. NZ Funds believe clients should have a mix of assets diversified across different geographies and sectors.
At NZ Funds, financial advice is at the forefront of constructing our clients’ portfolios. For example, a typical 0-54 year old KiwiSaver client holds an incredibly diverse mix of assets, including New Zealand shares, global shares, hedge funds, alternative assets, New Zealand bonds, global bonds, commodities, gold, currency and downside mitigation. It also includes themes such as digital transformation, rideshare and dividend yield.
The goal of diversification is not necessarily to boost performance. It will not ensure gains or guarantee against losses. Diversification does, however, have the potential to improve returns for whatever level of risk a client chooses to target. The current concerns around the ‘real’ economy means the market is set for more violent moves both up and down, especially as a second wave of COVID-19 takes hold in some countries.
Whatever the market brings over the next one, three or five years, knowing your portfolio is constructed to reflect your personal circumstances and invested by a professional means you can continue to build a robust, sustainable portfolio that generates significant wealth over time.
Source: NZX.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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