How to spot the next round of market winners (and dodge the losers)

Fund management legend Sir John Templeton once asserted that ‘Bull markets are founded on pessimism, grow on scepticism, mature on optimism and die on euphoria’ and investors could perhaps use this framework to work out where are now in the (bull) market cycle, says AJ Bell Investment Director Russ Mould.

“It might just help them spot where value and future upside opportunities can be found and – just as importantly – avoid areas which are so popular they could be overvalued and capable of doing damage to portfolios, especially as it can be argued that some areas of the markets are becoming bubbly.

“It is not easy to research an asset class, country or individual stocks, or what may be suitable funds, when no-one else is interested. It is harder still to avoid those which everyone is talking about with great excitement and therefore resist ‘fear of missing out,’ even if history suggests this is the best way to make premium long-term returns, as per Warren Buffett’s aphorism that ‘you cannot buy what is popular and do well.’

“The last 12 months are a fine example of how some careful, but not wilful, contrarian research could have yielded rich rewards. As the pandemic began to make its presence felt, share prices plunged, oil collapsed into negative territory and Government bonds’ haven status meant their prices rose and yields fell. Cryptocurrencies were tossed aside amid the general panic, too.

“Yet wind on a year, and

• Equities are beating bonds hands down
• Within equities, Technology is no longer the leading equity sector and defensive areas such as healthcare are relatively out of favour.
• Commodities (with the notable exception of precious metals) are doing well
• Within fixed income, the riskiest option – high-yield corporate paper – continues to lead Government and investment-grade corporate debt and overall the perceived haven of bonds continues to underperform
• Cryptocurrencies are way higher than a year ago and are firmly in vogue, as evidenced by the flotation of America’s leading crypto exchange this month (even if Bitcoin has stumbled again since then).