The past week has confounded many with a sudden heatwave sweeping the UK despite the seasons changing from summer to autumn.
Unpredictable weather means being prepared for anything. The burst of warm weather will have had people packing the suncream and cap but things can turn in an instant, making it prudent to throw a jumper and an umbrella in the bag if heading out for the day.
It seems that ‘unpredictable’ has been the main way to assess stock markets in recent years, whether it be due to Covid, inflation or the war in Ukraine.
Perhaps now is the time therefore to carry the metaphorical umbrella and add some defensiveness for a rainy day.
It might seem unnecessary, given that many commentators have been bullish on the economic landscape in recent days.
Invesco’s Jonathan Brown wrote yesterday that, in the UK, the market has been pricing in a worse recession than is likely, if at all.
“We have seen this play out in 2023 so far as growth estimates had been revised upwards even before the revised figures from the ONS,” he said.
Even if a recession does occur, Neil Birrell, chief investment officer of Premier Miton, told Tom Aylott investors should not be scared.
He argued that bad companies go bust during a recession, leaving good companies to rise up as a result. This may cause distress for people that lose their jobs, or for investors of poorly run businesses, but at an “overall economy level, it’s not necessarily a problem”.
Warren Buffett famously said to be greedy when others are fearful and fearful when others are greedy. While I would hardly argue that investors have been gluttonous this year, more people are starting to look to a brighter future, with the era of interest rate hikes likely nearing its end as inflation has started to fall.
It is usually around now that Murphy’s Law takes effect and something entirely unexpected comes out of leftfield.
It is perhaps for this reason that experts have been calling on investors to diversify this week – particularly away from the expensive US tech names that dominate many portfolios.
Investors at Vanguard and Columbia Threadneedle think it is time to start looking outside of 2023’s winning stocks, with the S&P 500 now at its narrowest in terms of market leadership for 40 years.
The ‘Magnificent Seven’ of Apple, Alphabet, Amazon, Microsoft, Netflix, Meta and Nvidia have rocketed this year on the back of hype for artificial intelligence, but the remainder of the US market looks pretty cheap.
Alison Savas, investment director at Antipodes Partners, also wrote about the issue on Trustnet this week, noting that US equities traded on an average 23x price-to-earnings (P/E) ratio – 10% more than the average multiple over the past 10 years.
She noted that valuations in Europe and China are closer to 13-14x earnings, which is much more palatable and provides some protection as they are not priced for perfection.
Although the big US tech stocks can continue to rally from here – and owning other assets that don’t rise so much will result in relatively lower returns – it seems most agree that, with so much uncertainty, now is the time to spread across multiple buckets. That seems like sound advice to me.