Rudi's View | Jan 11 2021
As market sentiment remains positive, maybe this year's biggest threats are excessive optimism and rising bond yields?
Inside the first Rudi's View update in the new calendar year:
-It's Still A Bull Market, However...
By Rudi Filapek-Vandyck, Editor FNArena
It's Still A Bull Market, However...
Welcome to 2021. What a year it's been already, and we're still less than two weeks into the new calendar year.
Probably the most important topic to start off with in the new year that is 2021 is that I have come to the conclusion that last year's exuberance and exceptional gains from taking risk won't likely remain without consequences this year.
To put it in simple terms: I think investors should prepare for a lot more volatility than what has occurred post April last year, and potentially for quite some nasty times to the downside.
This new bull market is by no means "over", but the easy gains seem to have been made. Below is the message that was sent out to investors in the FNArena/Vested Equities All-Weather Model Portfolio this morning:
Today we will be sending through a number of changes to the FNArena/Vested Equities All-Weather Model Portfolio.
The current changes to the model, are a risk management strategy designed to reduce the impact of any potential equity market sell off. It is highly unlikely that 2021 will simply continue the relatively straight-line recovery global equity markets have experienced since the brief bear market in March-April last year.
Driven by widespread optimism and confidence in the economic recovery, alongside US government stimulus plans and ongoing support from central banks around the globe, nothing seems to be able to upstage the ongoing uptrend.
Meanwhile, US bond yields are creeping upwards as general market optimism is feeding into anticipation of a return of consumer price inflation and possibly even a relaxation in central bank stimulus later in the year.
The risk here is that broad optimism is pricing in too much too early, while the risk for tangible disappointments is real and plausible. Most importantly, were bond yields to continue their upward trajectory this will lead to a re-pricing of all other assets, a major risk that needs to be heeded at a time of unbridled market optimism and historically elevated valuations for equities.
Within this context, the investment committee believe it is but prudent investors start taking precautions for a pause in the current uptrend, under a modest scenario outcome, or for a severe market correction in case irrational exuberance and "what could possibly go wrong?" meet the reality of slower growth and falling forecasts, if not a general reset of valuations.
As per always, the exact timing of such events, as well as the exact response by market participants is extremely difficult to predict. As a prudent investor, FNArena thinks it's better to act early than wait until it might be too late. More cash on the sidelines provides for optionality when the tide turns.
The above is why we are making multiple changes to the All-Weather Portfolio today.
With Kind Regards.
For proper context: I am by no means suggesting sell everything and hide under the bed, but for prudent investors it seems best to start reducing risk when markets are happy to ignore just about everything, including rising bond yields. The latter is what worries me this early in the new year.
When I sat down behind my desktop pc this morning, I had the intention to write a lot more about my concerns and new strategy for the year ahead, but an overzealous Ord Minnett (see today's Australian Broker Call Report) scuppered that plan. Life here at FNArena is never 100% predictable. I shall follow up with more details in the days ahead.