The crowded trades to avoid in 2021

Just like lying to your doctor about your alcohol consumption, or telling strangers that you've never watched The Bachelor, many of us (read: most) might not want to admit to another despicable vice: trading on consensus. 

Consensus trades permeate the investment universe, allowing similar ideas and strategies to expand with self-perpetuating force into that dread entity, the speculative bubble. 

As investors convince themselves of a position's eventual or continued success, these trades become "crowded", with little regard for the underlying fundamentals behind a business or industry. Meanwhile, contrarian ideas, those that seek to exploit the mispricings left in the wake of this mass sentiment, can be brushed off as passé. 

Investing with the herd isn't always a bad thing. When a consensus trade runs, everyone wins, as many did from Tech's stellar run in 2020, for example. But when it doesn't, everyone's losses are compounded, to sometimes disastrous effect (think the subprime mortgage crisis in the United States). 

So, to help you identify the consensus trades you shouldn't touch with a ten-foot stick (and those to grab with both hands) we've gathered 10 investment leaders to reveal the crowded positions they believe are currently gripping the market. 

You're welcome. 

1. The 'I believe in miracles' vaccine trade

A consensus trade that even your grandmother could have seen coming; the bet-everything-on-a-highly-successful-and-hiccup-free-vaccine trade. 

Since the Pfizer and BioNTech success story in early November, global markets have ricocheted to new highs, with investors and non-investors alike grasping onto the hope of a return to normalcy. Since the pair's 90% success rate announcement on November 9, the S&P/ASX200 has lifted ~6%, while the Nasdaq and S&P 500 have lifted ~9% and ~6%, respectively. 

"I think the data has been better than anyone could have ever expected - 90% efficacy," Magellan's Vihari Ross says.

"But it's important to realise that all it actually does is reduce your symptoms."

This has created a consensus view, seen in the recent rally in equities markets, that the vaccine will restore our lives - and the economy - to "normal", Ross says.

This position, backed by the perhaps rose-tinted belief that "inflation won't be a problem", creates a real risk for these companies that have lifted from the vaccine high, she says, given we still have economic activity that has to play out while the vaccine is distributed. 

"We still have the block-and-tackle of giving people injections, we still have to worry about whether the vaccine is a genuine vaccine passport," Ross says. 

"How does the economy go in the meantime while all that's taking place? I think there's still a lot of water to flow under the bridge before we can get as excited as potentially some parts of the market have already."

Meantime, mRNA vaccines, little known by the average punter prior to the pandemic, have also become a crowded trade, Platinum Asset Management's Dr Bianca Ogden says. 

"Who has made it? Everyone knows and can repeat it back to me: Moderna, BioNTech; that's a consensus trade," she says. 

2. The 'Inflation? Never heard of it!' trade

Over the past 12 months, the cash rate dropped low, lower, and, at 0.10%, very low indeed. But, as the saying goes, all good things come to an end.

For TMS Capital's Ben Clark, it's just a question of when. 

"The view that formed throughout 2020," he says, "was that rates are going to be at or near zero forever and everything was starting to get priced off that; revenue multiples, pre-revenue multiples."

Although this may be the case for a period of time, there may be cause for inflation over the months ahead, Clark says. 

"The economy has held up a lot better than we thought it would, we're going to see stimulus flow aggressively well into 2021 and the vaccination will start to get rolled out," he explains. 

"There might be a re-evaluation of where rates are headed and if they're going to start to move a bit quicker."

Similarly, Eley Griffiths Group's David Allingham says low inflation and low bond yields have been the consensus trade for a number of years. 

"The risk to consensus is that COVID has actually accentuated in the markets the sense that inflation is never coming back and that rates will be lower for longer," he says. 

"I think there's actually a real chance that COVID's actually going to do the exact opposite."

Allingham argues that we may well have seen the low in the US 10-year bond back in March or April this year; circa 30 basis points. 

"We've talked about this bull market ending," he says. 

"That's the real risk that we see; a bit of a tantrum in the bond market at some point during calendar '21. But, is it six months away or six weeks away? I think that could be quite violent and disruptive to the equity market for a brief period."

3. The 'Come on in, the water's fine' reopening trade 

Positive news on the vaccine front saw cyclical stocks, such as travel, leisure, and brick-and-mortar retail (which only months earlier were considered the dogs of the market) bid up by excited investors, certain that consumers were ready to reach into their pockets and spend big. 

"These are all stocks that were beaten down, and while some of them will make it through, there will be some - or a lot - that will still be susceptible to structural issues," Montaka Global Investments' Chris Demasi says

Demasi points to cruise operators as a key example, which he notes, have "doubled, tripled and quadrupled off their bottoms". 

"Now, I don't think demand's going to come back to pre-pandemic levels. People just aren't going to cruise the same way they used to," Demasi says. 

"But they've got to take delivery of a whole bunch of new, large ships, just at the same time that they borrowed a tonne of money, and they've got a lot of debt on the balance sheet." 

Through a more local lens, Lennox Capital's Olivia Salmon notes that while we did see investors pile into reopening trades perhaps in fear of missing out in mid-2020, the pendulum has now swung the other way. 

"It's almost like the fear of getting out," she says. 

"You've had some fantastic trading updates from the likes of Adairs, Beacon Lighting, and Collins Foods, and the stock price does nothing or actually goes down."

The market, she believes, is now looking 12-24 months ahead, with investors questioning whether that demand is sustainable. 

"I think for particular companies, like Adairs, people probably underestimate that pent up demand and the robustness of the business model to deliver growth throughout the cycle," Salmon says. 

"So I think the consensus trade is this fear of getting out, but probably too early."

But Centennial Asset Management's Matthew Kidman believes there to be real opportunity within cyclical stocks in 2021. 

"I think the consensus trade is that the Australian consumer or stocks exposed to that consumer are over-earning and there's a little bit of that, but I think it's overdone," he says. 

"We had a banking Royal Commission, we had a credit crunch going into COVID, and I think that's relaxed. And I think the consumer, who's saved 18-19% of their income, which is off the Richter scale, is ready to deploy again." 

Kidman points to the retailers that were sold off in 2020, as well as the mortgage market as being key beneficiaries over the coming 18 months. 

Sage Capital's Kelli Meagher disagrees and encourages investors to stick to growth stocks over the coming months.

"The consensus trade is definitely to sell the COVID-winners and growth and buy dirty value," she says. 

"Quality growth is always a winner over the long term in my view." 

4. The 'Gimme, gimme, gimme Tech' ultimate consensus trade 

2020 was the year Tech, already giant, became truly gigantic, with Tesla growing ~907% off its lows, while local fintech legend Afterpay soared around 1386% (and if I said that didn't spell regret for this lowly writer I'd be kidding). 

But is there still room for tech's rally to run (and for said writer to jump in) or are we witnessing a speculative bubble about to burst?

Paradice Investment Management's Julia Weng says investors need to be wary. 

"I think the market is on a whole buying a lot of good storylines and good top lines, but not necessarily looking at the bottom line or returns," she says. 

"Looking through the universe of Australian tech companies, there are actually very few that we think have been beneficiaries of COVID." 

Instead, she has seen various examples of sale cycles lengthening, high customer churn, and discounts having to be offered to disgruntled customers.

"The other thing that I think people need to realise is that R&D is a real investment, and the return on this R&D is quite ambiguous at this point," Weng says. 

"I think investors need to be quite discerning when it comes to looking at tech companies."

Spheria Asset Management's Matthew Booker also believes tech to be a crowded trade - as with other COVID beneficiaries. 

"It's a very crowded trade in those two parts of the market and they're not mutually exclusive," he says. 

"We're finding good value in the older world, the more traditional type industrial businesses. We own some companies that are quite cyclical, exposed to housing or materials and we're seeing good upside in those sectors." 

What crowded trades do you think are pervading the market? 

Let me know in the comments section below. 

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