The bubble-like characteristics that have been evident in financial markets for some time, add considerable risk to the investment backdrop. The elastic between the valuation of the popular stocks (such as the FAANGs* in the US, or in the UK, anything which offers investors exposure to Asian growth) and the unpopular stocks (anything domestically-focused remains completely out-of-favour) has reached breaking point, in our view.
We have already seen many signals to suggest that this valuation stretch is now starting to reverse: tighter liquidity conditions, pressure on emerging markets, slowing growth in China, vanishing momentum in the eurozone economy, along with the continued resilience of the UK economy – all point to a stock market which cannot remain in denial of fundamentals for much longer.
Timing a market reversal, or pinpointing a specific event that will trigger it, is not possible but neither is it necessary. It is an inevitable consequence of the way that free financial markets work and have always worked – in the end however, fundamentals always reassert themselves and therefore, they are the only thing matters in the long run.
* FAANGs stands for Facebook, Amazon, Apple, Netflix and Google (now Alphabet).