The Pain Trade

August 23, 2024

Part 1

Lots of commentators make themselves sound cerebral (and en-Joye-able?) by elucidating a negative view about markets with references to higher unemployment, recessions, volatility and bad times in general. And when markets continue to go up, they claim the "pain trade" is if markets continue to rally persistently.

Over the last 2 months I've seen many "market strategists" and commentators, especially from the major US banks, come out and claim the pain trade is equities higher.

I'll keep beating on about this, but negativity doesn't pay when investing over the long run and the pain is the egg on the commentator's face.

Portfolios should be levered to markets continuing to rise (if you're not in drawdown phase) because everyone is (or should be) inherently long market beta. The real pain trade in reality is always going to be when the market sells off, not when the market goes up.

And having said that, market falls provide opportunity to redeploy capital. But we seem to only get short bursts of market selloffs lasting 2-5 days followed by big rallies at the moment.

Let the good times roll? Or are there opportunities out there in depressed areas?

Part 2 – (un)crowded trades

Global funds are underweight US Tech (namely Mag-7) because of the active decision to allocate elsewhere due to valuations. See the earlier table of global equity managers which shows only approx. 30% of global funds beat MSCI World over 3 years?

And the most insane part - growth funds are on average underweight (!) tech while value funds are overweight (!!) tech. What is going on. Welcome to crazy town.

Global managers being underweight Mag-7 feels like the Aussie large cap managers being underweight financials.

Sounds smart right? Things might go down, there might be volatility, but gee being wrong hurts and tracking error widening while justifying your positions in the face of low fee ETFs eating your pie is another pain trade.

Nuance matters when talking about pain trades, and crowded vs uncrowded positions (among a million other things) can easily drive this rather than talking about global macro and valuation.

I'm yet to find someone who has a consistent edge on global macro and market valuations to drive returns, so why bother listening?

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