Of Cigars, Contrarians, Nerds and Herds
Comment of the Day

March 22 2021

Commentary by Eoin Treacy

Of Cigars, Contrarians, Nerds and Herds

Thanks to Iain Little for this edition of his Global Thematic Diary series. Here is a section:

Attitudes to risk have changed. In one month, investors have relegated Covid 19 and its mutant strains to the side[1]lines. They now obsess over inflation and a shaky bond market. Those who feared an equity bubble in February, spurred on by strident warnings from market opinion formers like Jeremy Grantham and Ray Dalio, have diminished in number and are keeping their heads down.

Anyone following 10 year USD bond prices will not be surprised. The move from 0.5% in August to 1.60% in March, a near tripling, has spooked bond buyers, with a consequent hit to gold, highly priced technology shares and other interest rate sensitive assets. But a more subtle and longer term conclusion may be drawn.

If sentiment is indeed registering such a confident attitude to growth and risk, it is reasonable to assume that investment positions are now largely in place to reflect that view. If so, the next concern of the market will be its nemesis: growth below expectations. Those investors who are now positioning investments excessively on the side of recovery, value or laggard stock sectors like banks may need to think twice before abandoning their long held commitment to healthcare, FMCG, e-commerce and technology. We are positioning client portfolios accordingly.

As Mark Twain once said: “if you find yourself on the side of the majority, it is time to pause and reflect”.

Eoin Treacy's view

Here is a link to the full note.

The reflation trend is increasingly being priced in and only a robust recovery will satisfy expectations for what it will entail for company earnings. The challenge for markets is the majority of people making English language predictions are sitting in the places with the most advanced vaccination programs.

Europe is lagging in vaccine roll out and much of Asia is only getting started because they did not have the urgency or technical knowhow to source vaccines. That suggests the global recovery will be unbalanced in the short term. That’s particularly true as the number of variants continues to grow in line with the number of global infections.

Medium-term, the number of vaccines in production and development means the world will be swamped with options inside of a year. By that time anyone who wishes to get a vaccine will have one. That’s going to be particularly beneficial for emerging markets. There was news today that India and Brazil have yet to get on top of their respective pandemic challenges and that does have the capacity to limit growth potential this year.

Nevertheless, the robust US recovery, fuelled by outsized stimulus, still has the potential to surprise on the upside. Consumers are not hanging around and spending across retail and travel sectors continues to pick up.

The number of reports looking at overextensions in assets like Treasuries and small caps and thinking about another rotation have proliferated in recent days. The Russell 2000/Nasdaq-100 ratio is somewhat overbought so there is scope for a reversion towards the mean but a sustained move below the trend mean would be required to question the break of the long-term trend.

The Value/Growth ratio has not had as impressive a move and this is not the first time it has broken above the trend mean. It will need to hold the 0.97 area if value’s newfound outperformance is to remain credible.

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