PERSPECTIVE3-5 min to read

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

Like in the 90s action movie Speed, you can’t take your foot too far off the gas in today’s markets.

20/05/2021
bus-speed

Authors

Johanna Kyrklund
Group CIO and Co-Head of Investment

In my family I am often mocked for being a cautious and slow driver. So it was ironic and a source of great amusement to them that I recently received a speeding ticket and had to attend a speed awareness course.

One of the main messages from the course was that 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. Just look at the sea of red in the table below, which shows how the valuations of major equity markets around the world compare to their 15-year medians.

The darker the red, the more expensive compared to history (according to a variety of measures, which are explained at the foot of this article).

Markets-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, as the table below shows. Trying to time the top of the market is not only impossible, but can be very expensive.

Market-keeps-rising-despite-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 my recent updates since the vaccine news of November I have singled out value, banks and Japan as the areas I favour in equity markets. The first of these two have worked out well and are positions I still like, but Japan hasn’t worked out so well as Covid-19 has re-taken hold in a way we didn’t expect.

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.

 

 

 

 

Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

 

Authors

Johanna Kyrklund
Group CIO and Co-Head of Investment

Topics

Perspective
Multi-Asset
Johanna Kyrklund
Multi-Asset Solutions
Coronavirus
Market views
Global
Japan
2021
UK

Cazenove Capital is a trading name of Schroders (C.I.) Ltd which is licensed under the Banking Supervision (Bailiwick of Guernsey) Law 2020 and the Protection of Investors (Bailiwick of Guernsey) Law 2020, as amended in the conduct of banking and investment business. Registered address at Regency Court, Glategny Esplanade, St. Peter Port, Guernsey GY1 3UF, (No.24546) . Schroders (C.I.) Limited, Jersey Branch is regulated by the Jersey Financial Services Commission in the conduct of investment business. Registered address at 40 Esplanade, St. Helier, Jersey JE2 3QB, (No.31076).

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