The Long and the Short of it

Chad Padowitz

Talaria Asset Management

Presenting recently on the state of the market and its behaviour, I was asked about some of the most risky elements currently at play.

I’ve written previously about market concentration and how a few players are skewing the index performance of the S&P 500, and this is definitely still the case as the below chart shows.   

Source: Bloomberg, As at 7/8/20

In fact the combined market cap of Apple, Amazon, Facebook, Microsoft, Netflix and Google are now bigger than the entire Japanese stock market.

So if you’re chasing the index and growth stocks now, it’s risky. 30 years ago, Japan was the place to invest with an economy growing when other developed countries were not. However, for those that invested at the Nikkei’s peak, they are yet to have made back their investment.

This goes to the notion of buying or holding long return versus short return equities. Those Nikkei investors are still waiting for a return on their initial investment – so they are long duration. Similarly the current darlings of the market in tech and consumer discretionary are long duration for anyone buying now. 

Back to today and looking at consumer discretionary stocks (of which Amazon is by far the largest component), they have had the highest correlation to US real interest rates (i.e. real yields lower, stocks higher), with the technology sector close behind.

What do both sectors also have in common? They’re getting larger.

So there’s greater concentration of a few stocks, that are longer and longer duration.

But this also applies to bonds where the total amount of bonds owned by investors has grown in the last two years. These bonds are longer in duration, increasing by 5% over the two years to a record high, as both corporates and governments have taken advantage of low yields to extend maturity.

In the end, equity and credit markets can weather a modest rise in yields, fuelled by better data. But the rise in duration across bonds and equities, means investors need to be wary about their exposure to that duration.

If there’s one thing we are sure of, there’s still a great deal of uncertainty out there. 

The information in this article is general information only and is not based on the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the current Product Disclosure Statement (PDS) for the Fund and consider whether the product is appropriate for you. Wholesale Units in the Talaria Global Equity Fund (the Fund) are issued by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No. 234454. Talaria Asset Management Pty Ltd ABN 67 130 534 342, AFS Licence No, 333732 is the investment manager and distributor of the Fund. References to “we” means Talaria Asset Management Pty Ltd, the investment manager. A copy of the PDS is available at or by calling Australian Unity Wealth Investor Services team on 13 29 39. Investment decisions should not be made upon the basis of the Fund’s past performance or distribution rate, or any ratings given by a rating agency, since each of these can vary. In addition, ratings need to be understood in the context of the full report issued by the rating agency itself. The information provided in the document is current at the time of publication.

Co-Chief Investment Officer
Talaria Asset Management

Chad is the Co-Chief Investment Officer and co-founder of Talaria Asset Management. He has more than 20 years’ experience in the financial services industry in the UK, South Africa and Australia. Talaria's investment strategy seeks to increase the...

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