Traditional tools for investment have been disregarded in favour of an overwhelming ‘fear of missing out’, which drove equity markets to start the year with a bang, Syz AM’s chief investment officer has said.
In an investment update, Fabrizio Quirighetti said the situation had shifted from one where investors feel the need to grab at anything to generate returns to one where they want to ride the rally at all costs.
‘We have been turning to TINA (there is no alternative) to explain the equity markets rally over the past few years, but it seems that we have now moved to FOMO (fear of missing out) to explain the way the year started with a bang for equity markets.
‘On one side, investors are getting more and more confident, or are at least reassured by the current solid and synchronised momentum in global economic growth that has been missing since the Great Recession,’ he said.
Quirighetti said a sudden economic growth spurt and favourable monetary policies meant that markets have fallen into what the IMF called an ‘economic sweet spot’. However, Quirighetti highlighted the IMF’s warning that this positive environment will not last forever.
‘It is no wonder, then, that asset valuations are getting stretched. So far so good, and we can’t rule out that last year’s rational exuberance could transform this year into a more irrational form. Is the next step euphoria?
‘It will obviously depend on inflation trends and monetary policy. As we don’t expect significant changes in the next few weeks, the party should continue for a while and thus we haven’t changed our positioning.’
In terms of current positioning, Quirighetti said Syz AM continues to favour Japanese and European equities, while watching for a dollar rebound to unlock attractive options in the US. Meanwhile, he is favouring equities over credit and some local emerging market debt over emerging market equities.
He added that as monetary policy support is slowly withdrawn, rate-sensitive markets may be affected. Even though these should not be seen as negative developments, there are risks involved with balancing different forces, such as rising interest rates, monetary policy normalisation, economic growth and inflation expectations.
‘As long as investors gradually adjust to, or rather anticipate, this new environment – which will become less favourable at the margin – there shouldn’t be severe damage. Just expect volatility to pick up and a less clear-cut upward trend on risky asset prices,’ Quirighetti said.