Head of portfolio management on the new volatility of 2021 and why, ultimately, valuations always matter
Equities are the “only game in town” right now despite modern-day warning signs of speculative excess in the market. Interest rates are going nowhere for an extended period of time courtesy of a global quantitative easing push. In addition, there is even more fiscal support coming, meaning the environment for equities is incredibly supportive. Derek Massey, head of portfolio management at HSBC Global Asset Management, is crystal clear, therefore, in his belief that everything is lined up for equities.
“We still have the position that, although valuations in some areas of the market are a little stretched, the fact rates are as low as they are allows us to afford a premium multiple on a number of equities,” Massey said.
“Quite honestly, until interest rates start to rise, it really is back to that TINA acronym of ‘There Is No Alternative’. With rates as low as they are, a bond investor can't generate much of any income. If they want to make a decent total return, then equities are the only game in town.”
However, while policy support – both fiscal and monetary – will continue to drive markets higher, Massey believes they is going to be a lot more volatile, something illustrated by the impact of the infamous Reddit chatroom.
Online groups that were sources of investment speculation back in the 90s now have scale, with millions of users. Their sophistication levels are also greater and the extent of their moves – as shown by the run-up on GameStop, when retail investors took on hedge fund short-sellers – and the fact people have access to money, means this type of volatility could be with us for some time.
Massey said: “The short side of the market can get very challenging at times because you have unlimited losses in short positions. You can double your money when the stock goes to zero but you have unlimited losses if the stock just keeps rising and rising and rising.
“That’s the one thing that the Reddit community took advantage of. It doesn't take much for that to reverse course; a sense of market sentiment and flows of funds. You knew it was going to end poorly, it was just a matter of time. That investment community is learning the lessons of past generations, where at the end of the day valuations matter.”
With money in their pockets and investors tech savvy, this represents the new volatility of 2021, with the scope of it particularly eye-catching. GameStop’s stock, for example, was boosted 1,000% in just two weeks.
HSBC doesn’t participate in the short side but Massey is a keen watcher, looking for signs the market has tipped into dangerous territory. For the professional investor, it reinforces the simple policy of not owning bad companies. When volatility hits, the market as a whole swings but if you understand it and own good stock, it shoudn't bother you, and may even present buying opportunities.
Massey paraphrased a Benjamin Graham quote to make the point: “In the short run, the market is a voting system, meaning it's a popularity contest. But in the long run, it's a weighing machine; valuations matters.
“There has to be some reasoning for the price of a security because otherwise, it's the greater fool theory of ‘I'm gonna buy whatever it is, and I don't know what it is, but I'm going to sell it to the next fool at a higher price’. All those manias end in tears. It's just difficult to predict the timing of it. In this case, given the scale and the size of these online communities, they can last a little longer [than normal].”
Many argue that these type of bubbles are a classic case of investor complacency, in which no one can comprehend losing money. As another industry professional said, “there’s nothing to be bearish about other than there’s nothing to be bearish about”.
Massey added: “There's a sense of greed that's in the market right now – it’s undeniable and you can you hear it through talk about the next big thing, whether it’s an alternative asset like Bitcoin or a GameStop.
“That's always been in the market. It’s human nature to always want to speculate and always have the next great idea. These little satellite positions should be just little fun things that you do, but when you put all your money into it, like some people did, there are some unfortunate cases.”