09 Mar

Pink diamonds: the answer to market volatility

In this article we look at the recent bout of volatility in financial markets, highlighting moves in the bond market (which doesn’t get as much attention as the stock market, even though it is arguably more important) and in high profile companies like Tesla, which have recently come under severe selling pressure.

This is relevant for pink diamond investors for the simple reason that these market moves highlight the importance of holding stable assets in a portfolio, which hold their value even as other markets fall apart.

Volatility is back

In February and the first few days of March this year, the bond market has come under severe selling pressure, with yields (which move inversely to prices) rising at one of their fastest levels on record.

In the United States and Australia, bond yields rose by as much as 50% at one-point last month, and have now risen by 70% for 2021 as a whole, with the bond market having its worst month in 25 years, as per this late February headline in the AFR.

Worst bond bloodbath since 1994 - Australian Financial Review headline.

The key driver of the bond market sell-off has been market participants repricing their expectations around the economy, with a consensus beginning to form that we will see much higher rates of economic growth, supported by the USD $1.9 trillion stimulus package recently passed in Washington.

Whilst higher rates of economic growth are a good thing, they also likely mean there will be less monetary accommodation (i.e. money printing) from central banks going forward.

That is a major problem for the stock market, for the simple reason that it is money printing, rather than a strong economy, that has been a major driver of stock prices for at least the last 10 years.

This much is made clear in the chart below, which comes from Yardeni Research and plots the S&P 500 price index (the major stock market index in the United States), alongside the combined total assets of the major central banks.


S&P 500 & Asset of Major Central Banks

S&P 500 & Asset of Major Central Banks

Source: Yardeni Research 

Note the extreme correlation of the two since 2009, which was the “end” of the Global Financial Crisis.

When central banks print money, it helps the stock market rise.

When central banks stop printing money or slow down the speed at which they are printing it, then the stock market often comes under pressure, and that is exactly what we have seen in the past few weeks.

The losses in the stock market have been particularly acute in some of the stocks that were previously market darlings, the most-high profile of which has been Tesla.

As per the image below from Yahoo Finance, the Tesla share price has fallen to USD $563, having traded as high as USD $900 per share in late January 2021.

That is a pullback of almost 40% in just over a month, with hundreds of billions of paper wealth evaporating into thin air, and Elon Musk losing his status as the world’s wealthiest man.

Tesla share price from Yahoo Finance.

Tesla share price from Yahoo Finance.

It’s not just Tesla either, with many companies whose share prices were flying up until late January coming under severe selling pressure.

This is perhaps best captured when looking at the ARK Innovation ETF, which specialises in investing in disruptive high growth companies and was one of the fastest growing products on the market in 2020.

It has also fallen by more than 30% in the past few weeks.

Australia is not immune either, with one of the most high profile ‘tech stocks’ on the ASX, Afterpay, falling from $160 to just over $100 per share (-36%) in the last month.

The recent sell-off in the bond market and crashing share prices in the tech sector are the perfect storm for investors, with the challenge only exacerbated by the fact that inflation rates continue to rise.

It also serves as a great reminder of the importance of investing in hard assets, and the opportunities they offer.

Pink diamonds: The ultimate diversifier

Compared to the volatility that we are seeing in other assets; pink diamonds stand out as a much safer long-term investment.

Not only have they provided very strong returns over the past 10 to 15 years, but they have done so in a relatively smooth fashion, having years where they generate very strong returns, and other years where they are more stable.

Crucially though, they do not suffer large and sharp falls in value like parts of the stock market can, or broader commodity markets, which are even more volatile than shares themselves.

These attributes help make pink diamonds great diversifiers in the context of someone’s entire portfolio, and it’s one of the reasons why clients at Australian Diamond Portfolio are looking to invest in this unique asset class.

With the supply of these pink diamonds becoming ever scarcer, we continue to expect demand, and therefore prices, will rise accordingly in the next decade, especially as market volatility and the risk of large losses in mainstream assets is likely to remain a feature of the investment landscape for the foreseeable future.

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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