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The growing disconnect between the underlying fundamental economic picture, company revenue and earnings, and current stock market levels is alarming. The ‘bad news discounting’ is at extreme levels, and the phrase ‘priced to perfection’ is particularly apt as we start to see second waves of the virus cause lockdown measures to be reintroduced in several places around the world.
Jobs are being cut and companies are collapsing. The future, in the short term, does not look particularly bright and yet, the equity market has kept rallying and pushed valuations to extreme levels. As a result, the likeliness for any further market upside from here on is very limited.
With interest rates being taken down to essentially 0 per cent or below across the developed world, this is going to have a longer-term impact on expected returns. The desire from governments and central banks to avoid recessions is leading to larger injections of liquidity into the financial system and this appears to be creating bubbles across multiple asset classes.
One of the issues with pumping trillions of dollars of liquidity into the markets is that it must go somewhere. Other than the US, there is little new government debt being supplied into the market.
Looking ahead rather than in the rear-view mirror – the path looks bumpy.
Markets seem to have run out of steam, at least in the short term, with limited fresh stimulus measures introduced. This has led to the S&P500 trading in a wide range over the last month and something that we expect to continue as we move through the second half of 2020.
Q2 earnings season – now upon us – is expected to provide us with insight as to what companies are expecting to happen. The dispersion of estimates is significantly wider than normal given the relatively few companies that tried to provide guidance during Q1 earnings.
Within our discretionary model portfolios, we continue with a few key beliefs:
Growth will be sluggish as consumers tentatively return to some version of ‘normality’.
We want to choose what business models, what geographic markets and what consumer base we have exposure to. Some of our core views – the rise of video games and the power of the emerging market consumer – have contributed strongly to our portfolios in 2020.
Buying and holding broad based ETFs is unlikely to generate the returns that clients expect – especially with the incredibly low interest rates and consequently yield that is available for investors.
What we have seen in 2020 so far is historically significant. It seems that nothing is off the table now and while bubbles can continue to get bigger, eventually they all pop.
By participating in the ‘bubble rally’ there is the risk of the bubble popping and experiencing volatility and a significant market drawdown.
We remain here to discuss our latest ideas, deployment strategies and updated performance numbers with you. Please contact your relationship manager if you would like to arrange a call or video meeting. In the meantime, I hope that everyone continues to stay safe and healthy.
In this week’s episode of Dolfin Discussions Geoff Wan, Fixed Income Analyst at Dolfin, is joined by Richard Briggs, Investment Manager, Emerging Market Debt at GAM Investments and Bennett Lim, Portfolio Manager, Diamond Capital to talk about Emerging Market Debt.
In this week’s episode of Dolfin Discussions James Gutman, our Head of Investment Portfolios, is joined by Caroline Miller, Chief Strategist at BCA Research, to discuss inflation.
In the second webinar of the series we focus on measurement and ask our guests ‘how can we measure impact when impact investing?’
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