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.



Where to put your money these days

It's like opening your best champagne at 5am

Avoid the acronyms and go for hidden niches


Most viewed in recent weeks

Who's next? Discounts on LICs force managers to pivot

The boards and managers of six high-profile LICs, frustrated by their shares trading at large discounts to asset value, have embarked on radical strategies to fix the problems. Will they work?

Four simple things to do right now

Markets have recovered in the last six months but most investors remain nervous about the economic outlook. Morningstar analysts provide four quick tips on how to navigate this uncertainty.

Welcome to Firstlinks Edition 373

It was a milestone for strange times last week when the company with the longest record in the Dow Jones Industrial Average (DJIA) index, ExxonMobil, once the largest company in the world, was replaced by a software company, Salesforce. Only one company in the original DJIA exists today. As businesses are disrupted, how many of the current DJIA companies will disappear in the next decade or two?

  • 2 September 2020

Welcome to Firstlinks Edition 374

Suddenly, it's the middle of September and we don't hear much about 'snap back' anymore. Now we have 'wind backs' and 'road maps'. Six months ago, I was flying back from Antarctica after two weeks aboard the ill-fated Greg Mortimer cruise ship, and then the world changed. So it's time to take your temperature again. Our survey checks your reaction to recent policies and your COVID-19 responses.

  • 9 September 2020

Reporting season winners and losers in listed property trusts

Many property trust results are better than expected, with the A-REIT sector on a dividend yield of 4.8%. But there's a wide variation by sector and the ability of tenants to pay the rent.

Every SMSF trustee should have an Enduring Power of Attorney

COVID-19 and the events of 2020 show why, more than ever, SMSF trustees need to prepare for the ‘unexpected’ by having an Enduring Power of Attorney in place. A Power of Attorney is not enough.

Latest Updates

Exchange traded products

Who's next? Discounts on LICs force managers to pivot

The boards and managers of six high-profile LICs, frustrated by their shares trading at large discounts to asset value, have embarked on radical strategies to fix the problems. Will they work?


Have stock markets become a giant Ponzi scheme?

A global financial casino has been created where investors ignore realistic valuations in the low growth, high-risk environment. At some point, analysis of fundamental value will be rewarded.


Interview Series: Why it’s gold’s time to shine

With gold now on the radar of individual investors, SMSFs and institutions, here's what you need to know about the choices between gold bars, gold ETFs and even gold miners, with Jordan Eliseo. 

SMSF strategies

SMSFs during COVID-19 and your 14-point checklist

SMSFs come with an administration burden underestimated by many. For example, did you know trustees need to document a member’s decision to take the reduced pension minimum under the new COVID rules?


Funding retirement through a stock market crash

On the surface, a diversified fund looks the same as an SMSF with the same asset allocations. But to fund retirement, a member must sell units in the fund, whereas the cash balance is used in an SMSF.

Australia’s debt and interest burden: can we afford it?

Australia has an ageing population and rising welfare and health costs, but it is still the best placed among its ‘developed’ country peers. Here's why the expected levels of debt are manageable.

Weekly Editorial

Welcome to Firstlinks Edition 375

There are many ways to value a company, but the most popular is to estimate the future cash flows and discount them to a present value using a chosen interest rate. Does it follow that when interest rates fall, companies become more valuable? Perhaps, but only if the cash flows remain unchanged, and in a recession, future earnings are more difficult to sustain. What do Buffett and Douglass and 150 years of data say?

  • 16 September 2020
  • 5



© 2020 Morningstar, Inc. All rights reserved.

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.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. 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.