Is the market in bubble territory?
Mixed response to U.S. President-elect Joe Biden's US$1.9 trillion (~HK$14.7 trillion) stimulus plan, growing COVID-19 resurgence concerns along with weaker than expected economic data put downward pressure on financial markets with the US’ S&P 500 index -1.48% last week and +0.32% year to date. European stocks also followed suit with the Euro Stoxx 50 index -1.25% last week. Locally the Hang Seng index rebounded strongly +2.50% on more upbeat economic data. As we mentioned to investors we should expect more diverging regional return and as a result market volatility will likely remain elevated in 2021.
AQUMON’s diversified US ETF portfolios were +0.00% (defensive) to -0.83% (aggressive) last week and -0.11% (defensive) to +2.00% (aggressive) year to date. AQUMON’s SmartGlobal HK ETF portfolio, with more regional exposure to Hong Kong/China, was -0.11% (defensive) to +2.00% (aggressive) year to date. Main portfolio laggers last week were US tech stocks (-1.54%) and gold (-0.68%). Chinese tech stocks saw uplift in comparison +1.56%.
AQUMON recently launched our SmartStock portfolios (investing into US, Chinese A-share and Hong Kong stocks). Investors' response has been phenomenal (our sales doubled) and we can’t thank all our new and existing clients enough. We’ll be updating investors shortly with their weekly returns as well.
Even though markets performance has been so-so investor activity is up significantly in January. With the recent investor euphoria the top question we get asked is: “is the market in bubble territory”? So we’ll address this key question this week in our Market Insights blog:
Majority of experienced investors think we are somewhat in bubble territory but yet are still bullish
We’ll let the numbers do the talking. According to research released this week by E*TRADE in the US tracking investor sentiment by more experienced investors, 66% of those surveyed believed we are fully or somewhat in bubble territory. What is interesting to also see is that 57% of the same group of surveyed investors are also bullish about the outlook for financial markets.
If investors feel like markets are toppish why would they still be bullish? Investors feedback that it is a mix of unprecedented fiscal stimulus, the Fed’s easy monetary policy, the vaccine rollout and relatively healthy earnings all contribute to their bullish outlook. This is quite similar with what we’ve been communicating to investors for the past few months.
So what do experienced investors feel is the biggest market risk ahead when comparing Q4 2020 vs Q1 2021?
What we can see is the US election risks subsided as we entered Q1 and the top risks viewed by investors are recession and pandemic related.
What about retail investors? Looking at the recent AAII Investor Bullish Sentiment we can see that recent US retail investor bullish sentiment is highest we’ve seen since mid-November 2020 and if looking further back will be the most elevated we’ve seen since January 2018:
For those that can remember back to January 2018, the US’ S&P 500 suffered a -8.81% pullback from late January into early February 2018. Does it mean a pullback is imminent? We don’t think it is so simple. Why? given the much higher retail investor participation in financial markets now (partially due to COVID-19) investor behavior and impact on markets has changed significantly. So we may argue it is possible, even though markets feel ‘hot’, the heightened bullish sentiment may actually continue to perpetuate support (by retail investors) for financial markets to reach new heights.
When looking at our own clients at AQUMON and talking with industry insiders it does seem like in January there is a major spike in investor activity and fewer investors are asking questions before making quick investment decisions. Although we appreciate the surge in business in January, we actively remind investors to remain rationale, calm and systematic when approaching their investments.
Fundamentals still supportive for financial markets
Even though it seems like we are reminded of poor economic data weekly some investors may ask why would we say that it is still supportive for markets then? There is 1 big reason for this:
FAANMG drove majority of returns and elevated valuations in 2020:
Although Facebook, Amazon, Apple, Netflix, Microsoft and Alphabet (formerly Google) are on average -4.88% year to date in 2021 (the S&P 500 is +0.32% in comparison) due to increased regulation pressure and rotation into cyclical sectors, but please remember these 6 stocks drove the majority of the returns of the S&P 500 in 2020. FAANMG stocks delivered +54.8% vs the S&P 500’s +15.5% (an outperformance of +39.3%).
This also applies to the heightened valuation as well. If we strip out FAANMG stocks from the S&P 500 according to Yardani Research forward looking PE drops from 22.4 to a more reasonable valuation level of 19.6. So if investors continue to have diversified exposure to more cyclical lagging sectors in 2021 we strongly believe valuations are not unreasonable and there is still upside to be had for investors. From a regional perspective, we still continue to like Asian stocks (particularly Chinese A-share market) for the same reason.
This is very much in line with what we’ve been communicating to our investors in the past few months that due to massive liquidity from central banks, upcoming economic recovery and improved corporate earnings this year that we still have a positive outlook for financial markets in 2021. Even so, we are not blind to the looming market risk and suggest investors should put more focus into managing their downside risk in 2021 either through diversification and/or holding a little more cash.
If you have any questions, please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON. Stay safe outside and happy investing!
Ken
About us
As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.
AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.
AQUMON’s major investors include the HKUST, Cyberport, Alibaba Entrepreneurs Fund and the Bank of China International's affiliate.
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