26 Nov

Beware the Euphoria

Stock markets are moving higher, with the Dow Jones climbing above 30,000 points for the first time ever overnight. Optimism regarding the outlook for the global economy in 2021 continues to build, as this week we saw the announcement that yet another company has come up with promising results regarding a vaccine for COVID-19.

This time around it was drug maker AstraZeneca, who in conjunction with Oxford University released the news that their vaccine was up to 90% effective. Whilst that isn’t quite as high as the vaccines being developed by Moderna and Pfizer, the Oxford/AstraZeneca vaccine does appear to have two distinct advantages over its competitors.

Those advantages are that it will be cheaper to produce, and perhaps even more crucially, it will be much easier to transport, with this new vaccine able to be transported and stored at fridge temperatures.

Whilst it’s not hard to understand why people are happy about the news, and why markets have reacted the way they have over the last three weeks since Pfizer first announced their vaccine trials, we do worry investors are getting ahead of themselves.

Markets are at risk of a major setback even if things do continue to progress well on the COVID-19 front, with a number of warning signs continuing to build.

Astute investors are best to stay on top of these developments, and continue to look for ways to diversify, protect and grow wealth through hard assets, including pink diamonds.

Beware the Euphoria

In the last two weeks, we’ve seen over USD $70 billion flow into global equity markets. As per the chart below, this is the fastest pace of inflows in the better part of 15 years, with optimism regarding a COVID-19 vaccine the key driver.

Flows into global equity funds

Whilst these numbers are incredibly impressive, and possibly bode well for higher stock prices in the short-term, over the medium to long-run it should actually be seen as a clear warning sign.

When markets are in a state of panic, it’s typically a great time to buy. Conversely, when markets are in a state of euphoria, the smarter money tends to look for opportunities to sell.

Time to diversify

It’s not just record inflows into equity markets that astute investors are seeing as a warning sign, with a handful of other readings also flashing red. These include market expectations for how fast companies will be able to grow profits, with recent research from Bank of America (BofA) stating that optimism on this front is at its highest level in nearly 20 years, with markets also having a big crash in the early 2000’s.

We’ve also seen investors drastically reduce their cash holdings, so they can chase stock markets and other assets higher. From the March lows in the stock market through to November, cash holdings in portfolios fell at the fastest rate on record according to BofA. Makes you wonder who is really left to buy assets if investors have already fully piled in.

Finally, as per the chart below, more than 65% of people now think we are in an “early-cycle” growth phase, whereas the number of investors who think we are in or will stay in a recession has plummeted.

FMS investors think early-cycle than recession
Over the next few weeks or month, none of this necessarily poses a major problem for markets. Indeed, we’d argue it’s one of the factors pushing them higher. But looking further ahead, it is clear that problems are coming our way.

Markets are trading at or near all-time highs, investor optimism is near all-time highs, cash weightings (i.e. protection) are near their lows, and the overwhelming majority is buying into the economic recovery story.

Given how confident market participants seem to be feeling, it is clear that not a lot has to go wrong for markets to suffer a period of significant turmoil, which will of course reignite safe haven demand for hard assets.

From our perspective, we believe astute investors are those who position their portfolios for these turns in the markets, and make sure they have adequate exposure to the kinds of assets which can protect and indeed grow wealth, irrespective of broader economic conditions.

As we head toward 2021 we think it’s safe to say that no other hard asset offers investors those qualities in quite the same way that pink diamonds do, with the supply restriction caused by the closure of the Argyle Diamond Mine set to propel prices higher in the years to come.

The interest in adding pink diamonds to their portfolio that we are seeing from an increasing number of our clients at Australian Diamond Portfolio speaks to the fact that a great number of you are seeing things the same way.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.

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