Rising market risk and what to do about it

Nina Kazmierczak- Partner and Principal Adviser
Sovereign Wealth Partners


Enjoying the weekend sun I came across an article by Tony Featherstone- former managing editor of BRW, Shares and Personal Investor magazines, which raised some interesting facts and points. Coupled with some recent research pieces, articles and discussions, there seems to be a lot more talk and awareness around the elevated IT sector risks, returns and a pinch of caution.


One stat outlined in Tony’s article that particularly caught my attention was that “the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google, via parent company Alphabet) are responsible for so much of the US bull run”, furthermore, “investment guru Marc Faber noted recently that the FAANG stocks represent almost 11% of global stock market value”. 11%!! Trillions of dollars of share market value rests in the hands of five companies.


Having met with Mark Landau, joint managing director and CIO of L1 Capital in early July, this statistic resonated a little louder. He highlighted that of all the stocks on the Nasdaq, very few generated a profit.

The US Tech sector has enjoyed an epic bull run since the market lows of early 2009, having now reached a risky juncture. The chart below is of particular concern for L1 Capital-



Furthermore, Citi Research published a thorough breakdown of the US IT market siting that the IT strength is somewhat surprising in the face of rising bond yields; only 1999 showed a similar divergence which ended badly in 2000-02. Typically, when rates rise, secular growers’ valuations take a hit. Admittedly, Citi saw no ‘bubbles’ in place currently, as was the case in 1999-2000, but there are reasons for concern about the price trends.


Secondly, making headlines is the Growth versus Value investing debate.

Citi Research Global Equity Strategy report for June 2018 suggests Citi analysts globally believe growth stocks look overextended and recommend investors start to build a Value tilt in portfolios. Price action “is starting to look ominously similar to the late 1990’s”. Julian Beaumont from Bennelong Australian Equity Partners, however cautioned investors on the definition of ‘value’ stocks, suggesting that tilting towards value may not always result in the capital preservation envisaged. Beaumont highlighted that “some value stocks are clearly cheap for a reason, be it industry woes, intense competition, or innovation upending an aged business model”. Notable examples included the big banks and Telstra, perceived by investors as ‘defensive’ and ‘blue-chip’. Yet, to Beaumont’s point, the banks dropped 3.85%, CBA fell 6.8% and Telstra 33% in FY18.


What to do –

Featherstone was in agreement with Citi Research, pointing out that he too has “thought about ways to reduce portfolio volatility”, believing markets may trend higher this year, but is concerned about the outlook beyond 12 months. He was not suggesting investors sell down portfolios, investors should begin to look at ways to reduce volatility in portfolios and increase cash in preparation to pounce when a downturn eventuates.

Essentially, Citi and Featherstone agree that it may be time to gradually switch tact and focus on capital preservation.

Capital preservation is a core believe for Sovereign Wealth Partners and lies in the heart of our investment philosophy.


What to do? Review – portfolios are not something to set and forget. They should be reviewed with regular frequency with strategies adopted to reduce possible risks on the horizon. The simplest thing to do may be gradually increase cash but for those with greater risk appetite, it may be to diversify into other growth assets.


A number of market commentators have observed that investors are currently chasing returns without reference to the risks they are taking – this is not an uncommon trait in a rising market. The focus on returns and the fear of missing out can become an overwhelming temptation.


At Sovereign we do not forsake risk considerations to chase returns. Investing is a long game, not so much about how much you can make in the short term but rather ensuring your objectives can be met over the long term.


We anticipate markets may trend higher in 2018 despite increased risks from geopolitical tensions, monetary disruption and sector specific considerations. We remain in the longest bull run cycle in history and note that caution and preservation should be front of mind as we get closer to the next correction.







IRESS- Australian 40 Financials Index (XFJ) returns 1/07/2017- 30/06/2018; 


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