Gleeful consensus on equities sparks concern over ‘groupthink’

Gleeful consensus on equities sparks concern over ‘groupthink’


Investor bullishness about global equities runs the risk of “groupthink” that underplays the challenges facing the world’s stock markets next year, researchers have warned.

Absolute Strategy Research, an investment consultancy, found in its latest quarterly survey that fund managers are now the most optimistic on stocks that they have been in the six years since it has been tracking investor sentiment.

Its survey of 200 asset allocators, chief investment officers, investment strategists and economists, published earlier this week, showed that 71 per cent thought global equities would be higher in a year’s time. This created the “risk of groupthink”, ASR warned, with investors displaying “ambivalence” towards historically high equity valuations.

In a separate survey of almost 1,000 professional investors published this week, Deutsche Bank strategists led by Jim Reid found that 67 per cent of investors believed the US S&P 500 index would rise over the next 12 months, only topped this year by last month’s reading. And 70 per cent thought Europe’s Stoxx 600 would gain ground over the same period.

“It’s fair to say that in the 25 years I’ve been doing this I can’t remember a time when so few (if any) disputed the central narrative,” wrote Mr Reid. Almost half of the respondents also believed global growth forecasts for 2021 would be upgraded in the next year.

Adding to the sense of glee, investors have gone “underweight” cash in their portfolios for the first time in more than seven years, according to a Bank of America survey released this week of investors with a total of $576bn in assets under management.

Global shares registered a series of record highs after November 9, when Pfizer and German partner BioNTech became the first of a group of drugmakers to report that their coronavirus vaccines were highly effective.

That helped drive the cyclically adjusted price-to-earnings ratio on the S&P 500 this month to its highest level since the dotcom boom, passing the 1920s stock market surge.

Mr Reid said he believed investors had become exuberant because November’s vaccine news “blew expectations out of the water,” with drugmakers reporting efficacy rates far higher than those for influenza vaccines. “Where the consensus could be wrong is if investors haven’t adjusted enough for the already high valuations” on stocks, he added.

Equity investors may also be ignoring the threat of inflation, below central banks’ targets across western economies, pushing beyond valuations next year, Mr Reid cautioned. Research by Goldman Sachs has showed that unexpected above-target rises in US inflation have historically been harmful for stocks.

Greg Davies, head of behavioural finance at consultancy Oxford Risk, said professional investors might be herding together because they had scant experience of forecasting the long-lasting effects of a global pandemic, or vaccine rollouts.

“This year has been dominated by one story, which is Covid, and this is a very new and unusual situation that financial forecasters have no pre-existing framework to use to form their views,” he said. “It is likely they are cleaving to consensus more than they otherwise would.”



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