Decisions, decisions
Comment of the Day

January 15 2020

Commentary by Eoin Treacy

Decisions, decisions

Thanks to a subscriber for this report from UBS which may be of interest. Here is a section:

In the next 10 years, demographic changes will have major effects. Millennials, the largest US generation, will be approaching age 50, while the last of the baby boomers will all be at retirement age. Artificial intelligence and virtual reality are expected to be mainstream. Automation will impact the labor force. Environmental disruption will likely continue, and sustainable investing will be mainstream.

Investors see these “mega-trends”— an aging population, technology and automation, diminishing resources— creating opportunities for the future.  In fact, seven in 10 want to take advantage of these trends to seek better returns.

As they look ahead, investors have an opportunity to ensure they are well positioned for the future—a future that will be here before we know it.

…In today’s challenging environment, investors seek various strategies to cope

To cope with this environment, 64% of investors are considering adding high quality stocks to their portfolios, while others would increase diversification and raise cash. Already, investors are holding 25% of their assets, on average, in cash. There is a clear connection between investor confidence and planning. Two-thirds of investors with a long-term plan in place are highly confident they will achieve their goals, compared to only 51% of investors without a plan. In addition, eight in 10 plan to discuss the impact of the US Presidential election with their advisors.

Eoin Treacy's view

Here is a link to the full report.

The “challenging environment” rhetoric, that has permeated just about all of the 2020 forecasts I have seen, is more a reflection of what people have in their portfolios rather than the background of markets.

The volatility of 2018 and the subsequent speed of the recovery left a lot of investors holding large quantities of cash. I remember quite clearly a discussion with a subscriber, in some of the emails of the day, questioning whether I would ever issue a sell recommendation, given the risk of imminent recession. The “uncertain” environment has been the rationale for not redeploying that cash and that represents fuel for the continued breakout.

Nevertheless, mean reversion is a major factor in every trend from time to time. The more overextended a price series becomes from its trend mean, the greater the risk of some mix of sharp reaction and/or ranging to unwind the overbought condition.

The mistake in expecting a pullback is to focus on the overbought condition following the breakout from a lengthy well-defined range. We define ranges as explosions waiting to happen and therefore the breakout is likely to be both surprising in its ferocity and persistence. The benefit of the doubt can be given to the upside provided the sequence of higher reaction lows holds.

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