Broker Watch

5 crowded trades to avoid in 2023

Tue 24 Jan 23, 10:19am (AEST)
Nick Griffin, Munro Partner
Source: Nick Griffin, Portfolio Manager, Munro Investment Partners

Key Points

  • 6 experts with 6 takes on what to avoid this year on your investment radar

This article was first published for Livewire Markets on Thursday 19 January 2023

It’s the dream: find a successful company that’s either recently listed, is about to IPO, or has so far operated under the radar, and scoop up as much of it as you can afford. Then sit back and watch the profits roll in.

But it's far more common to buy based on runaway investor sentiment related to future developments, anticipated outperformance, or positive headlines. This often also means there’s already a lot of buzz around such themes by the time retail investors catch wind of them. 

One of the most prominent recent Australian examples was the buy-now-pay-later theme, headlined by the ASX darling formerly known as Afterpay – now Block Inc (ASX: SQ2).

We’re not saying all, or even any, of the following themes, are entirely devoid of fundamental strengths. And moving with the herd sometimes pays off. But historically, hordes of investors buying into “crowded trades” have set off large market rallies and sell-offs that almost entirely lack fundamental basis.

So as part of Livewire Markets’ Outlook Series for 2023, we gathered six professional investors to name the consensus trades within the market, and whether or not they are avoiding them. 

These include one sector that’s riding the coattails of the energy transition, a dangerous currency play and others. Tune into the video below to find out what they’re each avoiding – and why – in 2023. 

And please scroll to the comments to share your own ideas on the sectors, themes or stocks that could burn investors’ fingers this year.

Our featured experts include: 

Note: We would like to thank the fund managers for sharing their insights for 2023 in the spirit of the Outlook Series. All of the fund managers featured in this series run diversified portfolios. This is not intended to be a set of recommendations. Please do your own research and seek advice from a professional before making any investment decisions of your own.

These interviews were recorded on 13 December 2022.

Industrials posing as decarbonisation enablers

Munro Capital’s Nick Griffin suggests some Industrials have been riding on the coattails of the energy transition – otherwise known as decarbonisation – a thematic you’ve likely heard plenty about in the last couple of years.

“Many industrial companies are claiming to be beneficiaries. They might have something to do with electrification, or they might have something to do with decarbonisation, but it's not really their core business. They are actually just industrials,” Griffin says.

“Some of those companies – and I’m talking here about some of the world’s biggest industrials – have done well this year. But we’re going into a slowdown, so we’re not sure they’re the right place to invest today.”

The crowd is on the wrong side of consumer discretionary

Nick Sladen of LSN Capital Partners answers the question in a different way, instead pointing to a sector where he believes a misguided consensus viewpoint is creating an opportunity.

“We think short or underweight discretionary retail is a very consensus view. And while we’re cautious on areas like household furnishings, and some parts of apparel, others within that space are attractive,” Sladen says. “Valuations have been extremely weak in that space in 2022, it's been a really tough year, and stock price performance has suffered.”

Many are expecting a similarly difficult climate for consumer discretionary in 2023, “but if the macro environment is perhaps not as bad as expected, that's an area where we think people are probably positioned on the wrong side,” says Sladen.

His team currently has selective exposure in the space but is cautiously watching it now.

For example, LSN Capital holds stock in Ardent Leisure (ASX: ALG) which owns Dreamworld on the Gold Coast. The fund manager also owns Auckland, New Zealand-based firm Tourism Holdings (ASX: THL), a recreational vehicle designer, manufacturer and provider of tourism-related activities.

“We think both of those businesses and companies are well-positioned to benefit from an increase in consumer spending over the next 12 months,” Sladen adds.

Cryptocurrency: "I wouldn’t go near it”

Marcus Today’s Marcus Padley pulls no punches in his assessment of cryptocurrency, singling it out as his crowded trade of choice.

“The crowded trade, which I think is absurd, must be crypto. It is dangerous, I think, for mainstream commentators to push people into crypto, talk about crypto, and predict crypto because it's a very volatile asset class,” Padley says.

“It doesn't matter whether it's going up or down – mainstream commentators are sucking people into an asset class they shouldn't be in."

He sounds the strongest note of crypto caution for those in, or near, the draw-down phase of retirement. The best-known cryptocurrency, Bitcoin, is down more than 77% from the all-time high of just north of US$60,000 it struck in November 2021, trading at US$20,853 on 16 January.

“If you have a superannuation fund, you're a retiree, you're living off the income, you mustn't listen to anybody on crypto. It's too volatile. It's still a crowded trade, and I make no predictions about it, but I wouldn't go near it,” Padley adds.

Quizzed further by Selby, he says crypto may not have even yet hit its nadir, and could “absolutely” end up at zero.

Materials look set to moderate

Conceding he finds it difficult to pinpoint many crowded trades in the current environment, Glenmore Asset Management's Robert Gregory nominates lithium – and to a lesser extent, coal – as his choices.

“There's been a lot of investor funds flowing into those sectors, probably chasing near-term returns. I think, particularly with lithium, there's a lot of money flowing in to build new supply. But I think the returns will moderate from those sectors,” Gregory says.

But his team continues to hold a position in commodities stock Mineral Resources (ASX: MIN– with a large exposure to lithium – which he describes as a good performer that should continue to do well within the fund.

“In coal, we've reduced our weighting quite significantly, but continue to own Stanmore Resources (ASX: SMR), Coronado (ASX: CRNand Whitehaven (ASX: WHC), so we're still quite positive on some of those names,” says Gregory.

Lithium has been bought by everyone (and their dog)

Michael Goldberg of Collins St Asset Management also singles out the materials sector – specifically battery technology and primarily lithium – as a crowded trade.

“I think we understand the importance, the drive, and why people are so excited about the transition to renewables. But I think people tend to underestimate how long it will take, the cost involved, the amount of mining that will need to go into it,” he says.

“And when push comes to shove, you look at the space and I think you'd struggle to find a retail investor who hasn't fully bought into the narrative of renewables and battery technology. Heck, you'd struggle to find an institution that hasn’t already bought into that narrative,” says Goldberg. “So, for us, when you find such a strong consensus, that's a space that we really do want to steer clear of.”

A crowded and risky trade

In line with both Goldberg and Gregory, Yarra Capital's Dion Hershan also nominates lithium as one of the most crowded trades.

"We can debate whether or not it's a bubble, but there is a speculative frenzy around anything related to electric vehicles and battery minerals," he says.

"Lithium is somewhat in the sweet spot. You've seen the stocks go up anywhere from fivefold to tenfold. You've seen the commodity price go up exponentially."

He also notes a sense of expectation that there are strong structural trends and that these will persist. 

"But there is still a business cycle, there is still a commodity cycle. Electric batteries will grow, lithium will grow, but we do not believe the prices we're seeing today will, in any way, be sustained," says Hershan.

"We think that's a crowded trade and we think that's a risky trade. And our approach is typically to leave early rather than leave late, and that's been reflected in our positions."

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Buy Hold Sell

Buy Hold Sell is a regular video series where Australia's leading professional investors share their views on Australian and Global Shares. This content is produced by Livewire Markets and has been syndicated to the Market Index website.

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