Investors are turning into tourists, and just like the worst of tourists, they’re stomping over the locals.
According to Luke Hickmore of Aberdeen Investments, there are two things that define tourists: unfamiliarity and a short-term stay.
We’ve highlighted the need for investors to try out different asset classes due to low yields, but crowding isn’t the issue to Hickmore, it’s how long these investors are there.
“It’s a bit like the old game of a brick and an elastic band, you can stretch it so far before it hits you in the face,” said Hickmore, whose firm manages $428 billion in assets. “It’s the same, if you’re pushed out of your natural comfort zone into riskier assets in terms of volatility, but it looks ok for now. As soon as your market you’ve come out of settles down and gives you returns that you normally expect, you’ll go straight back.”
This sort of movement will disrupt the markets that these “tourist” investors rush in and out of the market.
Additionally, much like a tourist in an unfamiliar city, these investors aren’t totally comfortable or familiar with the risks, especially volatility, of the assets they’re taking on to get the yield.
“They’re a tourist in the sense that they are there [in riskier assets] temporarily, but they are also tourists because they also don’t really get what’s happening,” said Hickmore.
This can impact everything from corporate behaviour as these investors demand more shareholders returns to volatility in the market.
The biggest fear, according to Hickmore, is that these tourists could be left stranded in a foreign asset class.
“Where is your safe haven?” questioned Hickmore. “If there is an economic or market shock where do you go?”
In this scenario, these investors have re-allocated their portfolio towards more risk, and some sort of market or economic downturn hurts them more than if they had continued a typical allocation.
Hickmore doesn’t think market tourism is going anywhere anytime soon, because the pricing of many “safer” assets doesn’t allow investors to get the returns they want or need.
So while they’re not taking pictures or looking over a map, the influx of market tourists may be sticking around for some time.