With equity prices at historic highs and a pandemic ravaging the world and its economies, it is clear that we are in an environment of low returns and high risk. Low returns because much of future growth has already been priced in and high risk due to the fact that some of this growth might not materialise or could be obliterated by exogenous shocks in a polarising world.
Yet, markets don’t seem to take notice.
After a sharp drawdown in Q1 of 2020 when the pandemic quickly ramped up, markets rebounded not long after on the back of fiscal intervention and more quantitative easing. And so asset prices are sky high, as represented by the graceful Koi above.
But the underlying economic picture looks grim. Unemployment is rising and the pandemic’s impact on Victoria and New South Wales has been so big that economic activity per capita in both states has shrunk to where it was at least three years ago.
Internationally, the picture is even worse with COVID-19 rapidly spreading across Asia, the European continent and in the United States. As a result, many countries have returned to partly or even full lockdowns, making operating difficult for many businesses.
But there are also some signs that the tide is turning. Vaccinations are now taking place in a number of countries, after the United Kingdom was the first to start doing so. Some of the Asian economies, including China’s, have managed to recover relatively quickly.
This raises the following questions:
- What does this heightened risk mean for the construction of equity portfolios? Should we be more conservative and risk missing out on the bullish sentiment in public markets? Or should we ride the gravy train as there seems to be no end to the optimism in markets?
- Are we permanently in an environment that favours growth stocks over value stocks, or is a regime change around the corner?
- Is passive continuing its rise, driven by government policy and the underperformance of value style managers?
- Should we add more portfolio protection in this state of heightened risk?
- Are ESG issues being ignored as the pandemic has taken centre stage?
- Is it sensible to diversify further into alternative assets, or are they just a drag on fees and will look bad in APRA’s heatmap?
These topics and more will be discussed at the 6th annual [i3] Equities & Equity Alternatives Forum.
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