Crowded Trade

 26 December 2020

Dear Fellow Investor,   

Crowded trade:

A trading position is said to become "crowded" when it is held by a vast preponderance of investors. Such positions develop when investors become so convinced of the logic of the position and its likely success that they become complacent. Crowded trades are dangerous because if anything occurs to shake the faith of these investors, efforts to bail out can be highly disruptive; few others are left willing to take the other side. Barrons

On 7 December 2020  JP Morgan warns of crowded trades amid markets clear consensus.

 

History shows consensus rarely plays out entirely:

Crowded trades include short dollar, long copper, long Bitcoin and long technology

 

There’s strong consensus in markets right now and investors need to position to hedge against crowded trades, according to JPMorgan Chase & Co.

The last time such a strong agreement on strategy existed was in late 2017 and early 2018, and that time period serves as a reminder that such a consensus view rarely plays out in its entirety, strategists led by Nikolaos Panigirtzoglou wrote in a note Friday. Global stocks reached records in January 2018 amid massive inflows, but extended positioning in risk assets became a concern and the next month the “Volmageddon” volatility spike crushed trades that many investors had viewed as a sure thing.

“For asset allocators, what is thus important is scale exposures to avoid an overly concentrated portfolio,” according to the report. “One way of scaling exposures to the consensus trading themes is by limiting exposure to the most crowded ones.”

Strategists from firms including JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley expect a risk-on environment into 2021 as the global economy recovers from the impact of Covid-19. Positive news on vaccines has bolstered the idea. With central banks and governments pumping in stimulus to counter the pandemic, many see the makings of a bumper period for assets such as high-yield debt, emerging-market currencies and value stocks.

For JPMorgan, those crowded trades include: short the U.S. dollar versus cyclical developed-market currencies, long copper and long Bitcoin. On the other hand, bullish positions on oil and gold are less crowded, as are overweight emerging-market equities relative to developed ones, according to the report.

Still, medium-term equity positioning appears to be average rather than overbought, the strategists said.

“Any equity correction in the near term would represent a buying opportunity,” they said. “We are only in the middle of the current bull market.”

There are opportunities in Malaysia, Japan, Singapore, Vietnam, Thailand and Hong Kong which are uncrowded.  Examples include banks, REITS, oil and gas and hospitality related shares.

Take care  and have a Merry Christmas and Happy New Year Bill

This is a crowded boat. What may happen to the boat ?