We have been and continue to be extremely concerned about stock market valuations. This is not based on a gut feeling but on demonstrable facts.
There is a massive disconnect between equities and the real economy. We have never seen something quite like that in our professional lives.
Sometimes you must look beyond the façade to understand the nature of the problem.
This image captures the huge disconnect between markets and economy.
How long can central banks continue to maintain stock market valuations artificially high for? No one really knows, but what we do know, is that you cannot corner the market indefinitely.
Market confidence seems far too optimistic. How can anyone say with a straight face that valuations are justified? The possibility a v shaped economic recovery is extremely remote and those who still believe in a miracle base that belief on the fact that central banks (led by Federal Reserve) are prepared to increase their indebtedness and purchase debt instruments and possibly even equities to support these crazy valuations.
All they are doing is enticing retail investors to invest in equities at distorted and obscene levels notwithstanding a dire macro-economic environment, poor fundamentals and falling corporate earnings
Markets are in complete denial and ignoring some of the blatant facts namely:
1. Until a vaccine is available and widely deployed, partial or full lockdowns are here to stay, causing untold damage to the global economy.
2. Predictions of a brief and severe contraction, a so-called V shaped recovery, is not a serious prediction – lets be real.
3. Supply chains have been fundamentally damaged and may take longer to repair than first thought – slowing down the prospect of a quick recovery.
4. Risk that liquidity problems for companies creates solvency issues resulting in massive bankruptcies (rising unemployment) will cause long term structural damage to the global economy.
5. Markets are significantly more expensive now (measured on a forward Price to Earnings basis) than in the past 10 years of bull markets.
Interestingly even when compared to “average past periods” of economic uncertainty the market is also overpriced by 50%.
6. We have a pretty dire economic situation with corporate earnings collapsing at a faster pace than during the Global Financial Crisis – see below red (2020) v blue line (2008).
7. We have never seen a decoupling of this magnitude between unemployment rates and stock markets. One should reasonably expect equity prices to trend much lower from here…
8. If you are unconvinced by our arguments – we provide yet another example of over exuberant markets and extremely negative economic news coming though. We call it two stories only one reality!
We could of course produce more evidence based economic facts to support our claim that on the balance of probability (we put it at 90%) equities are heading much lower.
Now is a crucial time to look at your portfolio and weigh out the risks and opportunities. If you wish to have a 2nd opinion about your portfolio feel free to contact our investment team via firstname.lastname@example.org or call +44 207 998 0570