Investor turns into speculator
Pfäffikon SZ, Switzerland – The global economy can accelerate through various impacts in emerging markets and the expected U.S. fiscal stimulus of President Trump. Investors are optimistic and blindly trust the too rosy expectations of analysts. However, today the risks are the bottom of the market. The investor slowly turns into a speculator.
Downward
The global trade is already on a downward trend since 2014. In preparation for the transfer of power in the U.S. many predictions showed an upward trend, but as yet it is not supported by facts. The risks in different investment categories are, therefore, increased instead of decreased. An example of a loudly ringing alarm bell is called “credit growth” in China. Additionally, the financial health of China is deteriorating at a rapid pace and is the debt of the vast country beaten off balance.
Protection
According to Trump, the magic word is protection, but for now, the message of the new president conveys political uncertainty. As a result, chances of sharp shifts and volatility are increased. In any case, the higher commodity prices do not brush away these problems. Investors bivouac between hope and reality. A fly in the ointment is the Fed’s influence, the system of U.S. banks. Shortly, a large part of the governance of the Fed should be re-elected, which —again— could cause a lot of uncertainty among investors.
Hunting
Historically, investors have been very cheerful; they settle for lousy returns at inflated purchase prices. Few investors are aware of the current asset bubble. The markets are still increasing further, making the yields are priced rosy. ‘Chasing performance’ has nothing to do with investing. Since 2013 we identify cracks in our models, where our vision finally turned to ‘structurally overvalued’ last year. A law is that the cash flow of a company should be maintained for at least ten years. Investors are faster satisfied with less, which make them a speculator without realizing it.
The valuation of future cash flows is from a historical perspective higher than in 2007 and slightly lower than the level of 2000. Based on these data, a correction of the stock markets by 50% to 60% is not inconceivable in the current cycle. Index investors will be roasted in such a scenario, but, strangely enough, they feel extremely comfortable. The automatically increased valuation risk is associated with the worst long-term returns since 2000 and 2007.
It remains for me to wish you a good weekend.
Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.
