Perspective

Johanna Kyrklund: Time to slow down (but not too much)


As a driver, you should not only observe the speed limit, but also the conditions around you. Just because you can drive at 60 miles-per-hour, doesn’t mean you should.

I thought there was a parallel to be drawn with investing; you have to watch valuations, but also the broader market environment around you.

Right now, equity valuations suggest it’s time to slow down in markets, but you can’t take your foot too far off the gas due to the dearth of more defensive options.

It’s a predicament that reminds me of the 1994 blockbuster movie Speed.

For those of you unfamiliar with Keanu Reeves’ oeuvre, in Speed he and co-star Sandra Bullock are in a bus which must keep above 50 miles per hour. If the speedometer dips below that level, the bus will explode.

While investors are not facing a literal fireball, those who drive too cautiously may be figuratively setting fire to potential investment returns.

There’s no denying that equity markets are expensive, but it’s clear there isn’t an abundance of defensive assets around to head for. Cash yields virtually zero. Government bonds are not much better – the days of getting 5% from US Treasuries or gilts seem like a distant memory.

What’s more, just because market valuations are expensive, it doesn’t mean they can’t keep rising. Trying to time the top of the market is not only impossible, but can be very expensive.

It may not be time to sell equities, but it’s probably time to curb your enthusiasm somewhat as it’s getting late in the game.

To continue the driving analogy, we’re off the motorway now and a more skilled driver is probably needed. Rather than being all in on equities, a more dynamic – and dare I say, multi-asset - approach may be needed.

If there is a lack of alternatives to equities currently, then you might ask what good a multi-asset approach is. Well, the advantage of such an approach is the ability to respond quickly and tactically as circumstances change.

Should bonds sell off, for example, there may suddenly be interesting opportunities, or should there be unexpected bad news on the Covid front, you may need to act fast.

We don’t have a crystal ball as to what’s around the corner, but as investors we just need to assess the range of probabilities. And it’s clear that there has been a shift in the balance of probabilities compared to when the positive vaccine news emerged in November.

Since then, both the MSCI World and S&P 500 have risen around 20%. So the potential upside remaining has probably shrunk, while the potential downside has grown.

The odds aren’t as attractive now, but it’s too early to be overly defensive. There is no recession on the horizon; you need to stay invested and you can’t sit in cash.

In general, the “reopening” trades have played out to a large extent now and markets have become more nuanced. Markets are getting more volatile, which is a sign that this current cycle is getting long in the tooth.

At such a time, rather than taking drastic measures like Keanu and Sandra did in Speed, it’s best to just drive more carefully.

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