With speculative excesses in stocks like Gamestop or Tesla, the fear of a financial market bubble is growing as we enter 2021. But it would be premature to give up completely, by selling or stopping buying stocks
Although long-term interest rates have risen slightly in recent months due to rising inflation expectations, interest rates are at historically low levels and central banks don’t appear to be heading for increases anytime soon as debtors – governments, corporations or homeowners – could not afford much higher interest rates. And because bond yields are so low, equity risk premiums are still affordable, even at high levels.
However, prices have reached an unreasonable level at least in the U.S. and in some industries and sectors such as information technology (computers, semiconductors) and green technology where fundamentals no longer seem to matter and P/E ratios are often above 30. In other markets, Swiss, emerging or European, prices, although quite high, remain more reasonable.
This spring 2021, I will favor small caps instead of large tech stocks, and as in most cases a value approach instead of growth (which was the best performing in 2020). In terms of indexes, I would mostly avoid tech ETFs. US equities, which make up a considerable portion of the overall indices, should also be underweighted. I would rather invest in European, emerging markets or Swiss ETFs, progressively and in very small amounts (thus smaller amounts than in 2020), as price levels are still high and a correction is possible.