Dilemma : Stay with TINA or run towards hills?
The September 2020 Global Fund Managers’ survey conducted by the Bank of America research team found that 58% of the global fund managers believe that global equities are now in a bull market. This percentage is materially higher than the 46% in August 2020. The proportion of fund manager who believe it to be a bear market rally has reduced in September 2020 to 29% from 35% in August 2020.
An overwhelming proportion of fund managers believe that “Long US Tech Stocks” is the most crowded trade. Though, the fund managers believing gold to be a crowded trade has reduced materially in September, as compared to August. “Short USD” trade is also seen gaining some popularity .
Continuing with the theme, JP Morgan Research (as quoted by Niels Jensen of Absolute Partners), finds that S&P500 is now pricing in almost 0% probability of a recession in US; while 5yr US Treasuries are pricing in almost 100% probability of a recession.
In his latest communication to investors, Niels warns that investors (and fund managers) may be flirting dangerously with TINA (There is No Alternative) in their chase for equities, especially US Tech Stocks. As per Niels, One of the most reliable predictors of long-term equity returns is the starting earnings multiple. When earnings multiples are in the low 20s, the best you can hope for over the next ten years is low single digit annual returns. As you can see, 10-year returns turn negative when the starting multiple is about 25 or higher.
Niels highlights that, as per Shiller’s Cyclically Adjusted P/E Ratio (CAPE), S&P500 trades at massive 32x earnings multiple, which means apocalypse may just around the corner and the investors must be running to the hills.
In a later post, I would like to evaluate where India stands in all this.
You may also like to glance through the following links: