Which are the expensive parts of equity markets?
The market is expensive as a whole but some companies have been neglected and offer compelling value and companies that offered the greatest risk for investors in 2021 are many of the same companies that have provided the greatest return to investors in 2020, according to State Street Global Advisors (SSGA).
The massive economic stimulus, the super accommodative central bank policy settings, and the potential for a return to normal, thanks to the vaccines, accounted for global equity markets trading currently at expensive multiples.
The manager warned that the greatest risk was associated with those companies now priced for perfection in terms of growth, low interest rates, and a world in which investors had very few other growth investment opportunities.
Following this, the information technology sector was trading at 65 times next year’s earnings and this left very little room for disappointment either in terms of growth not materialising or for long-term discount rates to move higher, the firm said.
However, the lesser talked about risk was if global growth would broaden out, improving the prospects for many other companies and reducing the excessive premium investors are willing to pay for the few growth companies.
“As other companies offer more growth and compelling value, the risk reward shifts and investors rotate. In the later part of 2020 we observed the early stages of this rotation and it will likely continue to be a theme in 2021,” SSGA said.
“Since late August 2020 the US bond market has been pricing an improvement in economic growth and an increased likelihood of eventual inflation suggesting both the assumption of growth not broadening and lower discount rates into perpetuity are not without risk.”
SSGA said that investors should stay positioned for the reversal of the risk rally but the psychological pressure to join the momentum trade would be huge as prices increase many investors will be more easily swayed by arguments for ever increasing prices.
“With ultra-low rates, record fiscal stimulus and the COVID-19 vaccine the prospects for global growth and company earnings are significantly better than they were in March 2020. Since this time markets have rallied to above pre- pandemic levels and have factored in much of this positive story,” the firm stressed.
“When we look across the investment landscape we see many signs of over exuberance from corporate behaviour to speculative trading and we are reminded of Warren Buffet’s famous phrase ‘be fearful when others are greedy’.”
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