The current protracted period of market calm is nothing but “extraordinary”, says Keith Wade, chief investment officer at Schroders, the asset manager.
“The last time we saw anything close to this was in the 1990s, but back then GDP growth and interest rates were both a lot higher. It’s also unusual that political turmoil hasn’t had any impact,” he adds.
Mostly, investors have been buying more equities on good news and have been ignoring the bad news. Though, admittedly, there hasn’t been too much of the latter of late.
“This year, economic performance has been very strong, and that has increased investors’ confidence,” says Leif Hasager, chief investment officer at the Danish wealth manager Formuepleje.
Where’s the dip to buy on?
Investors’ ‘buy on dips’ mentality, which came to the fore most strongly in the aftermath of the Brexit vote and Donald Trump’s election, remains alive, although there arguably hasn’t been a real dip to buy on for a very long time now.
“It hasn’t been fruitful to position yourself for a correction, so there has been a certain amount of throwing in the towel” - Keith Wade
This has already prompted some investors, such as Pictet AM’s chief strategist Luca Paolini, to make an attempt to adjust the definition of a market correction.
It is indeed rather difficult to find bears at the moment. Those with short positions in recent years have usually found themselves at the wrong side of the trade, and most have taken their losses.
“It hasn’t been fruitful to position yourself for a correction, so there has been a certain amount of throwing in the towel,” explains Wade.
Hasager has also stopped thinking about hedging. “Hedging is costly. If you take hedges for too long, you will always lose money. We are confident enough there will be no correction for the next three months not to take any hedges.”
The Dane, who has had a “maximum overweight” to equities across his portfolios since the Trump election last November, remains comfortable with equity risk despite equity markets trading at all-time highs amid ever loftier valuations.
“It’s a question of relative attractiveness too,” he says, arguing bonds are closer to bubble territory than stocks. “We’ve only seen a very modest increase in bond yields so far.”
Wade agrees: “It is very much a relative story. Equity yields remain a lot higher than bond yields.”
Anders af Hällström of the Finnish multi-family office Aval, is even so unreservedly bullish that he has allocated all his money to stocks.
“We have a 100% allocation to equities now. I have no put options either as we are confident about the outlook for equities and the economy, so we are overweight value stocks as well,” he says.
According to Expert Investor data, the vast majority of fund buyers and asset allocators in Europe remain overweight equities, and very few expect a market correction any time soon. At the Expert Investor Sweden forum in Stockholm this week, about 80% of delegates said they were overweight equities, while none were underweight.
But if there is such a consensus that it’s right to be bullish among investors, shouldn’t that be a warning sign?
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