01 Jul

Don’t Follow the Crowd

It’s been a volatile end to the first half of calendar year 2020, with equity markets correcting in June.

Despite a strong bounce from the late March 2020 lows, investors in shares have seen their wealth go backwards in the first half of the year, with the Australian share market for example ending June almost 13% lower than where it started.

The performance of the market over the last six months can be seen in the chart below. It shows the huge sell off in equities from late February to late March, the recovery from late March to early June, and the weak end to the month just finished.

ASX 200 Price chart

Source: Google, S&P ASX 200 price chart.

The chart makes it clear that stock market investors went from peak fear to unprecedented euphoria this year, with some signs of nervousness again beginning to creep in.

All up it has been a volatile and largely unrewarding six months for these investors, with markets arguably more fragile today than they were when the year started.

Over the last six months we have also seen huge volatility in the FX market, with the AUD declining from USD $0.70 to USD $0.55 before rising back toward USD $0.70 again.

Meanwhile, the local cash rate has been cut to just 0.25%, with the Reserve Bank of Australia (RBA) also beginning its own money printing, or Quantitative Easing (QE) programme.

Against this, pink diamond investors have experienced another period of relative calm. The market has displayed its traditional capital stability, with demand remaining strong, despite the logistical bottlenecks caused by COVID-19.

As we enter the second half of the year, we expect the forces propelling pink diamond prices higher to strengthen, with the planned closure of The Argyle Diamond Mine a likely catalyst for the next upward leg in prices.

Don’t follow the crowd

Despite the continued health challenge posed by COVID-19, and the economic shock it is causing around the developed world, investors of all sizes have gotten caught up in the stock market rally that began in late March.

In so doing, they are exposing themselves to huge risks, as on many metrics, the market has never been more expensive (and therefore likely to deliver sub-par returns) than it is right now.

The bubble-like nature of the market can be seen in the following two charts, the first of which shows an explosion in the number of people with equity trading accounts from major online brokers in the United States.

New Brokerage Accounts

Source: Andreessen Horowitz

Note that the above chart doesn’t show the growth of RobinHood, an extremely popular investment platform which has added 3 million American’s to its platform in 2020.

Similar growth levels have been seen in Australia, and in the UK, with these numbers suggesting a greater rate of retail investor participation than that which took place in the late 90s/early 2000’s tech bubble.

The second chart, seen below, shows the net exposure that hedge funds, who are supposed to be the most sophisticated investors on the planet, have to the equity market. As the chart highlights, it is almost at record highs, with hedge funds having drastically increased their exposure over the last three months.

Hedge Fund current net exposure to the equity markets

Hedge Fund current net exposure to the equity markets

Source: BofA Global Fund Manager Survey, Bloomberg.

Taken together, these two charts should be seen for the massive warning signs that they are. Retail money has flooded the market, whilst hedge fund money is about as aggressively positioned as it ever has been.

It’s important at this point to remember that markets are driven by both the marginal buyer, and the marginal seller, of a particular asset. The above charts tell you that nearly everyone has done about as much buying as they possibly can.

Charts like these are not a guarantee that markets are going to crash, but they should encourage investors to diversify, and make sure they have exposure to tangible safe havens in their portfolio, which can protect and grow capital even in environments where equity markets fall.

This includes assets like pink diamonds.

Timely reminder on investing in diamonds

We wanted to finish this weeks “In the Loupe” by referencing an article that was published in late June 2020, titled: “As diamond sales boom during lockdown, could they be an investor’s best friend?”

The article included the following key messages:

  • Demand for high quality investment diamonds is very strong today.
  • Not all diamonds are investment grade, with lower quality stones actually declining in value.
  • To give yourself the best chance of success investing in coloured diamonds, you are best to use experts, as no two diamonds are exactly the same.

We agree with all of the above points, with these factors helping drive Australian Diamond Portfolio’s focus on investor education.

It is also why we have built our business around sourcing only the highest quality investment stones for our ever-growing Australian client base, and ensuring we offer the complete investment solution, including certification, valuations, storage, and insurance.

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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