4 crowded trades to avoid in 2022

In behavioural finance, herd mentality refers to investors' tendency to follow the decisions of "the crowd". Throwing their own independent analysis to the wind, these investors instead rely solely on their emotions, betting their hard-earned savings on the "next big thing" that has captured the market's attention.

So, in an Outlook Series first, Livewire headed south of the NSW border to Melbourne, to interview eight of the city's best investors on the crowded trades they believe could run out of steam in 2022. From profitless growth stocks with frightening valuations, pumped-up retailers, reopening trades and of course, US tech - these fundies shared the consensus trades they'll be avoiding in the 12 months ahead.

That's not to say following the herd is always a bad thing. Just last year, many pointed to overvalued tech (with the NASDAQ 100 running a whopping 47.58% ahead in 2020) as an overheated trade. And yet, the NASDAQ 100 called their bluff, returning another 26.63% in 2021. (Aussie tech, however, performed much poorer, with the S&P/ASX All Technology Index returning just 3.72%).

Whether you decide to follow the crowd or not, check out the video below for four dicey trades our fundies believe are currently gripping the market. And let us know in the comments section if there is a trade you believe could burn investors in 2022. 

Our featured experts include:

• Steve Black, Pengana Capital Group
• Nick Griffin, Munro Partners 
• Richard Ivers, Prime Value Asset Management
• Michael Steele, Yarra Capital Management 
• Chad Padowitz, Talaria Asset Management
• Dean Fergie, Cyan Investment Management 
• Mark Landau, L1 Capital 
• Adrian Martuccio, Bell Asset Management 

Note: These interviews were recorded on 8 and 14 December 2021. 

1. The "treat yo' self, we made it through 2020/2021" trade

Three of our nine Melbourne-based fund managers pointed to consumer discretionary stocks like retailers as the crowded trade they would be avoiding in 2022. For those not in the know, consumer discretionary stocks are commonly defined as those that sell “non-essential” goods and services to consumers, like homewares, cars, and holidays.

Pengana Capital Group’s Steve Black points to heavy support for retail stocks on the back of COVID-19 lockdowns as a cause for caution.

"A lot of people were bored at home, with free money dollied out to them by the government and they spent that money online with these retailers," he said.

"For us, there's not really enough return, given the risks; we're not being paid to take that risk where the share prices of those retailers are trading at the moment."

Similarly, Prime Value's Richard Ivers is avoiding the consumer discretionary space as we head into 2022.

"You've got the risk of both valuation and margins, or profits," he said.

"That seems to be more prevalent in the consumer discretionary space than anywhere else in the market at the moment."

For Yarra Capital Management's Michael Steele, auto companies and retailers are looking particularly overheated.

"There's no doubt if you look at the short term, there's a positive outlook (for these companies) with the current high savings rates," he said.

"But as you look at longer-term over the next three years, the current earnings levels are completely unsustainable."

2. The "hey, look over there" mirage trade

For two of our fundies, it was concept stocks or profitless growth stocks that were looking overheated for the year ahead. After all, several of these stocks have captured the public's (and media's) attention over the past few years thanks to over-subscribed IPOs, sky-high valuations, and a peculiar lack of product (as yet).

"A lot of them are great ideas or great products, and we want to be a bit more patient and see whether we can get them at the right valuation," Nick Griffin of Munro Partners said.

"That's just a trend we've noticed in the last couple of years, and it's a trend that we're not going to buy into in 2022."

Griffin points to the electric car market as a clear example of this overvalued crowded trade.

"Rivian is a great product. We like the car as well. The grill's really exciting. It's probably not worth US$100 billion-plus at the moment, quite frankly. And Lucid's the same," he said.

"We get it, the social trading revolution, or the retail revolution - these people find great products, and I think that's fantastic and that's what they should be doing. They now just need to marry finding a great product with some fundamental analysis, and you'll get a great investment."

Similarly, L1 Capital's Mark Landau points to concept stocks as the crowded trade he will be avoiding in 2022.

"I think the scariest part of the market for us is definitely those profitless growth stocks, anything that is selling a dream, concept stocks, would be the part of the market we're probably avoiding the most," he said.

"People are inventing new ways to value these companies because they can't find any cash or earnings to justify their share prices."

Think "total addressable market", or "price to sales in 10 years time", for example.

"Stick with the basics, cash and earnings. And if they have to convince you of what life will be like in 10 years time, it's probably a bit too dangerous for us," Landau added.

3. The "trust nothing but tech" trade

For Chad Padowitz of Talaria Asset Management, US tech was looking particularly crowded as we kick off the first few weeks of 2022.

"(It's) quite a vulnerable space because it's trading at very high valuations, and is pricing in continued high growth alongside very low-interest rates, which we think is a very challenged and difficult pathway to navigate into the next year," he said.

This risk is not exclusive to large names like Amazon, Apple and Microsoft, Padowitz said.

"Certainly, that risk and challenge do permeate all the way down," he added.

Bell Asset Management's Adrian Martuccio agrees, pointed to large-cap tech as a crowded trade going into 2022.

"There's a big valuation bubble up there. We're a little bit cautious with rising interest rates and rising inflation," he said.

"We love things that have pricing power, which a lot of the techs have. But the guys that don't make money could be in for a bit of volatility coming into the new year."

4. The "market timing is my specialty" trade

Last but not least, we have the COVID reopening and shutdown trade, which has become the most crowded area of the market - depending on whether we are reopening or in lockdown - according to Dean Fergie of Cyan Investment Management.

"I feel that it's been tried and probably failed so many times over the last couple of years - it's really unpredictable," he said.

"Everyone's trying to do it, and so we've got to try and guess what everyone else is thinking. And it's one I just think I need to avoid."

What crowded trade will you be avoiding in 2022? 

The fundies have openly revealed what trades they believe look overheated as we kick off the New Year, but we would love to hear what you think. Let us know what crowded trades or themes you will be avoiding in 2022 in the comments section below. 

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