The week ahead: Are you being seduced by a growth trap?

Market Updates

Iron ore has continued to trend higher over the last week, with the Dalian Commodity Exchange’s January month iron ore futures contract trading at 1074 yuan ($164 per tonne), at the time of writing.

Fundamental reasons got us there: Brazilian Mining giant Vale’s recent production guidance suggests a tight iron ore market in 2021, while Chinese spending on infrastructure remains high. Beyond that however, one is left wondering just how much, if any, speculation has begun to creep into the market and influence prices.

Last week, China Baowu Steel Group went as far as to press the government to investigate the recent surge in iron ore prices, citing speculation concerns. While Atilla Widnell, Managing Director at Navigate Commodities, recently said:

‘We believe benchmarks were over-inflated to begin with, given that large volumes of ‘hot money’ have filtered through into iron ore as a speculative play on future economic growth.’Ultimately, given the commodity’s impact on the Australian economy, the Australian dollar, and a number of large capitalisation ASX-listed companies, such as Fortescue Metals Group, investors should continue to closely monitor the performance of iron ore.

A week of blockbuster IPOs

US markets were dominated by a flurry of high profile IPOs over the last week – with food delivery company DoorDash and rental platform company Airbnb listing to significant fanfare. The share prices of both soared upon listing, as retail investors clamoured to get their hands on these ‘hot’ stocks.

Despite this perked-up interest, the Dow Jones, Nasdaq, and S&P 500 all finished out the week lower.

More conceptually, this flurry of IPOs has seen concerns around valuations and irrational exuberance again come to the fore.

For example, the tech-heavy Nasdaq 100 has witnessed significant multiple expansion in the last year – with the benchmark currently trading on a 38.2x earnings multiple. A year ago, it traded on just a 26.4x earnings multiple. With exuberance reaching new highs – as the prospect of a vaccine and ultra-low interest rates boosts market confidence – investors should carefully monitor valuations, especially in tech, moving forward.

Investors should also remember that the market’s preoccupation with growth is not a new phenomenon, but part of a broader cycle. Indeed, as Jeremy Siegel wrote in The Future For Investors (2005):

‘The growth trap seduces investors into overpaying for the very firms and industries that drive innovation and spearhead economic expansion. This relentless pursuit of growth—through buying hot stocks, seeking exciting new technologies, or investing in the fastest-growing countries—dooms investors to poor returns. Our fixation on growth is a snare, enticing us to place our assets in what we think will be the next big thing. But the most innovative companies are rarely the best place for investors. Technological innovation, which is blindly pursued by so many seeking to ‘beat the market’ turns out to be a double-edged sword that spurs economic growth while repeatedly disappointing investors.’

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