Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 328

How much will you risk to feel comfortable?

If you were to look only at headline indices, you’d be forgiven for believing that we have been living through one of the longest bull-runs in history. In Australian dollar terms, the S&P/ASX200 price index is up 41% over the past 10 years, while the MSCI World and the S&P 500 have jumped 153% and 268% respectively.

But, if the world’s stock markets are doing so well, why do so many investors seem so anxious?

A few big stocks have driven returns

It turns out they have good reason. While the headline indices look good, it is only because of a few US mega stocks that have done exceptionally well over the period. If you look at an equal-weighted version of the index, instead of the more common market capitalisation-weighted index, the average stock globally has been mired in bear territory for over 18 months, while the top 50 US companies have done significantly better.

In order to understand this unhappy bull market and where it might be headed, we need to go back to 2009.

Gun shy in the wake of the GFC, many investors took a safety-first approach. They filled their portfolios with assets they could trust and, more importantly, understand. As a result, government bonds and bond proxies, blue chip shares with recognisable names and stable share prices did well.

As interest rates fell closer to zero, quantitative easing continued and growth remained elusive, so the fears engendered by the subprime explosion that started everything were replaced by new worries. What if growth never returns? What happens when central banks turn off the liquidity taps? What has happened to productivity? These worries helped to push bond prices even higher and the price of stocks that were perceived to be safe or that demonstrated any kind of fundamental growth higher still.

From 2016 came added uncertainty

And that was before 2016. Before Britain was divided by Brexit. Before the rise of populism in Europe and before Donald Trump began his mercurial presidency and led the US into a trade war with China.

Since then, the steady flow of money into what have traditionally been considered safe assets has turned into a flood. As the world has felt more uncertain, so the value of near-term certainty has skyrocketed. What had begun as a reaction to the recklessness of 2008 now borders on the ridiculous. And, there is no better example of this than the bond market.

Investors are now buying bonds at prices so high that they are guaranteed to make a loss if they hold the bond to maturity. More than US$17 trillion of bonds are trading at negative yields. Some of the buyers of these bonds are central banks, whose goal is to push down yields, and some are banks and life insurance companies who are compelled by regulatory or timing issues to do so.

But other buyers are just anxious, so uncertain about the future that they would rather make a small, guaranteed loss than put their money into something perceived to be more risky. Of course, for many the hope is that they will be able to sell the bond to an even more anxious buyer before it matures. That kind of thinking defeats the purpose of buying a bond in the first place – which is, the theory goes, the certainty that even in the worst case at least you get all of your money back.

Safety rather than fundamentals

This anxiety also permeates stock markets and has resulted in the unhappy bull market this story started with. The shares that have driven the index have been a mix of bond proxies with well-behaved share prices and those that have performed unusually well over the past four years.

In a world characterised by uncertainty these stocks have been comfortable to own and, as such, highly prized. Low volatility and momentum stocks trade at a 24% and a 47% premium to the broader market respectively.

Put another way, stable, established firms like Coca Cola trade at a Price to Earnings (P/E) ratio of 33 times, a level usually associated with fast-growing newcomers, while Netflix, for example, one of the stocks that has set the market alight in recent years now trades around a P/E ratio of over 100. Investors are willing to pay more than 100 times its current year’s earnings to own its shares.

And that is where the problem comes in. The criteria by which many investors are choosing stocks at the moment has everything to do with how comfortable it feels to own them and very little to do with the fundamentals of the businesses involved.

A P/E of 33 would be justified if Coke’s business was booming, for example, but it isn’t. While the drinks maker is still selling a huge number of soft drinks, its revenue line is stagnant and it is paying out all of its profits and piling on debt to meet its dividends. Likewise, while Netflix’s latest quarterly earnings report showed that it had grown revenue 26% year-on-year, justifiable questions can be asked about how likely it is that growth will continue at such a pace, especially with new players including Apple and Disney moving in on the streaming video action.

This is not the first time that markets have been driven by factors other than fundamentals, nor will it be the last. But it is important to acknowledge that it is happening. Currently, the market seems to be asking investors one question: How much are you willing to pay to feel safe? And the answer they appear to be giving is: a lot. Perhaps a better question to ask is: How much are you risking in your quest to feel comfortable?

 

Charles Dalziell is Investment Director at Orbis Investments, a sponsor of Firstlinks. This report constitutes general advice only and not personal financial or investment advice. It does not take into account the specific investment objectives, financial situation or individual needs of any particular person.

For more articles and papers from Orbis, please click here.

 

  •   16 October 2019
  • 2
  •      
  •   

RELATED ARTICLES

Where to put your money these days

Market narratives are seductive and dangerous

The role of shareholder yield in a portfolio

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

The investment that sidesteps the new tax traps

Tax rules have changed, but many investors are still using yesterday’s strategies. Insurance bonds may offer advantages for those seeking greater control, tax efficiency and certainty about their wealth.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Latest Updates

Planning

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Investment strategies

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

Economy

Population growth masks Australia’s productivity problem

For years, investors have benefited from a seemingly reliable growth story. But recent national accounts raise uncomfortable questions about what has really been driving Australia’s economy and whether that can continue unchecked.

Investment strategies

Why tomorrow’s winners may not be today’s index leaders

The stocks that built retirement balances over the past decade now dominate many portfolios. The new challenge is whether these companies can continue meeting the increasingly high expectations embedded in today's share prices.

Investing

What earnings surprises reveal about future returns

Sometimes the most important information in an earnings result isn't the number itself. It's the possibility that the market's assumptions have been fundamentally wrong and future earnings may look very different.

SMSF strategies

Individual SMSF Trusteeship directly liable for ATO fines

A rarely discussed detail buried in SMSF structures could dramatically change who wears the cost when something goes wrong. With penalties rising, a decision many dismissed as administrative may deserve a second look.

Investment strategies

The currency bet you didn’t know you made

Buying global shares means making two bets: on the companies and on the Australian dollar. Most investors consciously choose only the first. Last financial year, the second bet cost 8.5% in returns for many investors.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.