Exposure rates of the Dorval Asset Management Range – 29th January 2021

“Robinhoods” have made an incursion onto the stock-markets, bringing with them concerns of a bubble: these fears are legitimate but should be put into perspective, as these events take place against a backdrop of a more robust world economy than expected that is set to pick up the pace in the spring to boot.

Users of the Robinhood trading app have hit the headlines as they joined forces to defend GameStop after hedge funds had bet against the company. The legal and moral implications of this behavior are still up for discussion, but the crux of the matter lies elsewhere: the number of amateur traders has surged dramatically over the past year or so, as they often play a share price rise on companies they like, regardless of profitability and valuation considerations. This bubble is fairly localized for now, but it comes hot on the heels of many professional investors’ sometimes excessive enthusiasm for the stocks of the future, such as green-tech companies. According to figures from Goldman Sachs, companies with extremely high valuations currently account for 7% of market capitalizations and more than 20% of trading volumes on Wall Street (cf. chart 1).

 

Proportion of extremely expensive stocks on Wall Street
Companies with sales of more than USD50m with an EV/sales multiple above 20

% of market cap
% of trading volume

 

These excesses are probably behind recent volatility on world stock-markets, and some observers have drawn parallels with events in 2000. However, the aggregate valuation for world stock-markets remains far short of trends in 1999/2000 (cf. chart 2), with the current context increasingly characterized by extremely low real interest rates, along with entirely warranted hopes that the world economy will take an upturn in 2021, so it seems a bit early to pack it all in at this stage.

 

World stock-market valuations adjusted for cyclical
variations do not look excessive

MSCI World/world GDP ratio smoothed over 10 years
MSCI World/earnings ratio smoothed over 10 years (Shiller P/E)

 

In this respect, the latest economic indicators are broadly encouraging on average. US GDP jumped 4% in annualized terms in the fourth quarter, driven by vigorous investment performances (+25%), despite slower consumer spending. Meanwhile on this side of the pond, Germany and Spain edged up slightly by 0.1% and 0.4% respectively, and the French economy held up better than expected, shedding 1.3% vs. a 4.0% plunge projected. Overall, aggregate GDP for countries that have already reported 4Q figures is ahead of last year’s showings (cf. chart 3). The world economy is nowhere near as far off its pre-crisis track as most economists had feared just a few months ago, and it should largely be able to narrow this gap by the end of next year, as we can reasonably expect the world to get a better grip on the Covid-19 pandemic soon, and on the back of ongoing highly accommodative economic policy. From this standpoint, the announcements from Novavax and Johnson & Johnson on their vaccine efficacy help bring some perspective to the worrying news on virus variants.

 

 

Even before vaccines, world GDP has already made up a good share of its lag

Index 100 in 4Q 2019
Pre-crisis trend
GDP for countries that published for 4Q (China, US, Germany, France, Spain, Mexico, Korea)

 

 

Our positive main scenario therefore remains unchanged. However, we have tactically cut back our flexible funds’ risk exposure in several stages since Christmas in response to the speed of these trends, and our exposure is currently close to or slightly below figures for our reference indicators. Barring any last-minute surprises, we aim to push up our equity exposure rates over the weeks ahead, depending on the market environment.

 

 

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