It’s been almost exactly a year now since here in the UK we were all sent home from our offices and got used to a life with significantly less variety.
For some, a lack of variety was hugely beneficial in 2020. Stock market investors who eschewed variety in favour of a few powerhouse stocks could have done very well indeed. Many with a diversified portfolio were ruing their prudence as they saw a small cohort of tech giants perform outstandingly.
The share price of the newly self-anointed “Technoking” Elon Musk’s Tesla – to use an extreme example – surged 695% in 2020 alone.
No wonder the “FOMO market” was born. This fear of missing out, using an acronym previously avoided by anyone over the age of 30, led many investors of all stripes into what appeared to be a one-way-street for making money.
Could growth disappoint?
I actually think that the expectations for economic recovery might be overdone, and there is scope for disappointment.
Though I am far from pessimistic on the economic outlook, there is the possibility that high hopes are not met. As Europe slides back into lockdown amid rising cases and a poor vaccine rollout, it’s a reminder that Covid-19 has not gone away by any means.
What’s more, the willingness and capacity of people to suddenly return to “normal” activity may be overestimated. Flights, for example, are now significantly more expensive than before, as I found out recently when attempting to visit my mother in Italy. So will there really be a sudden resurgence in travel and tourism, even supposing people are allowed and not too nervous to do so? Similarly, will people really want to eat outdoors in the UK’s notorious April showers?
Then there’s the risk of the vaccine rollout faltering as politics or supply issues get in the way.
Contrary to some market expectations, I think it’s not guaranteed that it’s plain sailing back to normality from here.
Three trades for rising yields
The FOMO market is over; it’s a more broad based opportunity set now and a more “normal” investing environment. Investors will be able to bide their time, waiting for openings.
I would highlight three areas of interest to me as a multi-asset investor today.
- Japanese equities. When Treasury yields rise the Japanese market has historically tended to do well. This is because as bond yields rise, the dollar tends to strengthen versus the yen. Japan is an export-orientated economy, so a cheaper yen makes Japanese goods more appealing. The industrial sector is also a dominant part of the Japanese economy, which should do well as the global economy gets back on its feet.
- Value. Value investing means buying good quality companies that are trading beneath their true value. When the discount rate rises, so does the appeal of real earnings today that you don’t have to pay over the odds for.
- The UK. Like value stocks, the UK equity market is an area that has been unloved and untrendy for some time now. With the double whammy of Brexit uncertainty and Covid, the market has underperformed its peers significantly in recent years and there is potential for a catch-up. What’s more, for investors in the UK with sterling strengthening, it may be worth keeping some money in their home market.
Elsewhere, I can see bond yields rising further from here, but I am not anticipating the current selloff getting much worse. Indeed, bonds may gain in attraction later in the year.
One area I would be avoiding currently is gold. Although traditionally seen as an inflation hedge, I don’t think we are seeing the “right type” of inflation now, in that gold performs less well in these early stages of an inflationary cycle.
Another investment I would avoid is perhaps the ultimate trendy asset, bitcoin. I do not consider it an investment - it’s purely speculative. This is an unfashionable opinion to some. But if diversification, patience and prudence are coming back into vogue, maybe Huey Lewis and the News’ hit song from the 1980s was right: it’s hip to be square.
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