OCM Commentaries

Market Commentary 4th November 2021

By November 4, 2021 November 5th, 2021 No Comments

Risk assets have typically improved throughout the week, pushing the OBI portfolios higher as financial markets recover from September’s price correction. While we expect to receive clarity on UK and US central bank policy announcements this week, we remain cautious in our portfolio positioning, noting a handful of headwinds that still remain over fourth quarter.


The spotlight on earnings has supported risk asset prices again this week, albeit investors have appeared to increasingly react to political and economic data flows. Since the beginning of the week, central bank announcements have allowed investors to positively reset expectations ahead of the rest of the year, however we remain cautious in our portfolio allocation after the strong rise in risk asset prices over the past month. While rising share prices have positively supported equity markets and the OBI portfolios, by delving deeper into the source of capital flows, we can see that rising price levels have been supported by ‘dumb money’.


Dumb Money / Smart Money Confidence

In general terms, analysts and economists have historically referred to ‘Dumb money’ as representing those investors that are typically trend-followers, who wait until a trend is well-established before investing. Although they can still benefit from this trend, it is common to see dumb money enter financial markets at a time when a trend may be peaking in terms of momentum, which is when the ‘smart money’ is selling. Often, but not always, smart money refers to institutions, who are often able to enter and exit financial markets at the beginning and end of market trends. Dumb money, in this case, often represents retail investors with less experience, resources, and investment capabilities. The chart below, which highlights the confidence of smart money and dumb money within markets, uses a dozen indicators to characterise each type of money.



As we can see above, Smart Money / Dumb Money Confidence demonstrates a counter-cyclical relationship – when one goes up, the other goes down, and vice versa. The dashed lines highlight the typical range these two indicators trade between. As such, while we can see that smart money is near its 3-month low, dumb money is at a 4-month high, and it is almost exceeding the average range that it trades between. Historically, when dumb money confidence is over 70%, the 500 largest firms in the US return an annualised rate of 3%, below their historical annualised average return of around 10%. This relationship is similar in regions such as the UK and Europe, too. As such, the current discrepancy between smart money and dumb money is clear and suggests the recent run up in risk asset prices has been due to increasing flows from dumb money. As a result, not only are we concerned by major headwinds such as supply chain constraints and inflation, but we are also mindful of the downside risks in the short term due to dumb money confidence and smart money cautiousness, which helps to justify our defensive positioning.


Given this, we are looking to add further protection to the OBI portfolios in the next couple of weeks by increasing portfolio cash levels. We see this as being beneficial for a number of reasons. Firstly, the OBI portfolios are all exceeding their annualised performance targets, and a core principle of the OBI strategy is to mitigate downward drags on portfolio performance. Secondly, the majority of our assets have recovered from the September price correction, allowing us to raise cash levels from positively performing assets. Lastly, we expect financial market volatility to remain elevated towards the end of the year, and the lack of confidence from smart money investors reinforces our view on this.


While our medium to long-term outlook for financial markets remains positive, these portfolio changes will increase our cash levels from c.20% to c.30%. The advantages of this are lower portfolio volatility, a mitigation of negative performance surprises, as well as increased flexibility as we look to re-enter financial markets once our short-term outlook improves.


Considering this, we will keep you up to date as and when we make these portfolio changes. The OBI portfolios have performed strongly in the year-to-date time frame, and we remain positive on the outlook for 2022 and beyond, when many of the key risks that we are experiencing today are expected to subside.


Performance Over the Week


In the table below, US-based equities were some of the strongest performers over the week, with the earnings season remaining broadly positive and the latest announcement from the Fed meeting market expectations. On Wednesday, the Federal Reserve announced the tapering of asset purchases by $15 billion a month, beginning in mid-November. Investors reacted positively to this update, noting the potential risk to risk asset prices if the central bank had surprised financial markets.


UK equities were flat or slightly down in the weekly time frame, as the Bank of England surprised some market participants by maintaining interest rates at 0.10% on Thursday. Despite some investors anticipating a rate rise, policymakers highlighted slowing growth as a greater concern than the prospects of an inflation spike. In Europe, equity markets were slightly more positive, supported by recent economic data flows and robust earnings announcements.


Within Asia, Japanese equities strengthened as the ruling LDP party eased to victory, strengthening  Japanese Prime Minister Fumio Kishida’s ability to increase economic stimulus. In China, equities erased their gains from the week prior, with concerns over the Evergrande property contagion and the firm’s latest bond payment re-emerging to the forefront of investors’ minds.


Similar to last week, corporate bonds, gilts, index-linked gilts, and strategic bond performance extended upon last week’s gains, while high yield and strategic bonds remained flat over the week.


As highlighted above, the OBI portfolios have continued to perform strongly, extending their gains beyond their annualised performance targets. While OBI 6 to 8 experienced the strongest uplift over the week, OBI 3 to 5 also performed strongly after the rise in equity and non-equities.


Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value.  You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio.  The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations.  Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads.  Unless stated, income is reinvested into the portfolio.  The information contained in in this document is for information purposes only.  It does not constitute advice or a recommendation or an offer or solicitation for investment.


Key Events We Are Watching This Week:

  • Wednesday 10th: US Inflation Rate, October.
  • Thursday 11th: UK GDP Growth Rate, September.


This Day in History

On this day, in 1922, British archaeologist Howard Carter and his workmen discover a step leading to the tomb of King Tutankhamen in the Valley of the Kings in Egypt.


Thank you for reading, have a great week!

Jason, Gina & Ben