Twitter LinkedIn
    Monday, May 23
    Login
    0 Shopping Cart
    Twitter LinkedIn
    Private Equity InsiderPrivate Equity Insider
    • About Us
    • Digital Events
    • Our Network
      • Reach
      • Sponsors
      • Members
    Private Equity InsiderPrivate Equity Insider
    Home»Markets»Rational bubble puts markets on high starting point for 2021
    Markets

    Rational bubble puts markets on high starting point for 2021

    January 2, 20215 Mins Read
    LinkedIn Facebook Twitter Email WhatsApp
    Share
    LinkedIn Facebook Twitter Email WhatsApp

    While investors appear bullish, some wobbles in equity markets should be expected in year ahead

    After navigating a global pandemic, financial markets begin 2021 with a case of déjà vu. Just like 12 months ago, bonds and equities are kicking off January at expensive starting levels.

    The human and economic toll of Covid-19 has left deep scars that will take a long time to heal. However, for markets, 2020 ended up being a remarkably strong year after the initial fright in March when coronavirus started to spread.

    For those investors who stayed the course from the beginning of the year, there were double-digit gains from US and global equities and solid returns from bond markets. The US benchmark S&P 500 index was had an annual gain of more than 16 per cent while the MSCI World index was up just over 14 per cent. The Bloomberg Barclays Global Bond index was showing total returns for the year of about 9 per cent.

    “What was seen as being extreme a year ago has only become more so,” says David Kelly, chief global strategist at JPMorgan Asset Management. “Valuations for stocks and bonds are higher from a year ago. Investors should also recognise that, after a surprisingly good year for portfolio returns, asset prices look stretched.”

    The market trend is in some ways a rational bubble given expectations that sustained low interest rates will compel investors to own more equities and higher-yielding corporate bonds of lower credit quality.

    “About four-fifths of the world’s investment grade debt yields 1 per cent or less,” note Citi Private Bank strategists. “Investing in productive assets will be necessary to earn real returns. That is especially good for equities.”

    Buoyant equity prices and valuations reflect a bullish outlook for profits and economic growth in 2021 on the back of a vaccine-powered rebound. Support from governments and central banks also should extend over much of 2021, with the aim of bridging the gap until consumers and companies eventually spend their accumulated lockdown savings.

    “The fog of uncertainty from the pandemic is clearing and from enormous pent-up demand, there will be a simultaneous global recovery in the second half of 2021,” reckons Mr Kelly.

    Strategists say this means investors should look beyond richly valued large US companies towards emerging markets, cyclical industries such as banking and energy, and small and mid-cap companies.

    That shift has already started, with equity market leadership broadening out from the so-called pandemic winners. Since November there has been a rush into the laggard areas of equities and bonds for companies that typically benefit from a reflationary economy.

    But rebounding economic activity should warrant higher longer-term interest rates and at the very least, spur market uncertainty about just how long central banks will stick with their bond-buying policies. This will become an increasingly hot topic should the global economy not only meet, but exceed current IMF expectations of 5.2 per cent growth in 2021.

    The crushing of interest rates by central banks has significantly reduced risk premiums across the financial system. That is best illustrated by a “real” US 10-year Treasury bond yield sitting near minus 1 per cent after taking into account inflation. This yield was flirting with breaking below zero a year ago. It is therefore reasonable to envisage a rise back to that level in the coming year — a prospect that could knock highly valued shares.

     

     

    “Global equities in particular are at high valuations, and now extremely sensitive to rising yields,” write analysts at TS Lombard. But in what is a widely-held view, they “suspect central banks would act swiftly to try to correct any major tightening in financial conditions”.

    This expectation of further support from central banks has kept asset prices climbing for now. Market sentiment ended 2020 full of ebullience, demonstrated by the crowding of investor money into popular assets such as Tesla and Bitcoin.

    This is where one lesson from recent market history that becomes pertinent now we’re in 2021. During the past five years, volatility measures for equities and bonds show a pattern of generally tranquil conditions for much of the time. Then the music suddenly stops and volatility spikes.

    This time last year Alberto Gallo, portfolio manager of the Algebris global credit opportunities fund, raised the cash weighting in his portfolio. Starting in 2021 he is repeating the move as markets move into what he says is a “euphoric phase”. A third of the Algebris fund has been put into cash and hedges on assets. Investor Bill Ackman also hedged his equity exposure in November by providing insurance against corporate defaults.

    Another strong year for equity markets will penalise such investors for holding high cash levels or hedging exposures. But given the overwhelmingly bullish investor consensus and crowding into popular areas of markets, it would be surprising if asset prices avoid a serious wobble at some point in the next 12 months.

     

    Source: Financial Times

    Related

    Can't stop reading? This and all news articles are property of their creators, many are not owned or provided by Private Equity Insider. As an event organizer and community platform, we curate content from reliable sources for your suggested reading, and advise you to read the full articles from the referenced authors and sources.

    2021 investment markets Trends
    Share. LinkedIn Facebook Twitter Email WhatsApp

    Related Posts

    Private equity titans dance until the music stops under the California sun

    May 9, 2022

    Abrdn Will Shift Funds Focus to Private Assets and Emerging Markets

    April 27, 2022

    BlackRock Russia exposure down $17 billion since February, company data shows

    March 14, 2022

    Minnesota commits $2.6 billion to private equity, private credit

    March 1, 2022

    Comments are closed.

    Other Articles

    Linley & Simpson and Lomond Capital have Lloyds’ backing for merger ambition

    January 4, 2021

    Principal Closes Private Debt Fund With Nearly $600M in Commitments

    February 11, 2021

    S&S Activewear Acquired by Private Equity Firm Clayton Dubilier & Rice

    January 21, 2021

    Motive Partners up limit in new fund to USD2bn

    March 25, 2022

    Private Equity Insider LLC
    1212 Avenue of the Americas
    New York City 10036
    USA

    [email protected]

    Twitter LinkedIn
    © 2022 Private Equity Insider LLC. All rights reserved.
    • About
    • Terms of Use
    • Cookie Policy
    • Privacy Policy
    • Contact Us

    Type above and press Enter to search. Press Esc to cancel.

    View Cart Checkout Continue Shopping

    Sign In or Register

    Welcome Back!

    Login to your account below.

    Lost password?