Investors have been advised to exercise a higher degree of caution due to the fundamental and valuation risks posed by the US election, the pandemic and a starkly bifurcated market that has seen equity prices become stretched amidst increased demand for high quality businesses.

Such are the risks that the opportunity for missteps is “at an all-time high”, according to Intermede Investment Partners principal James Kim, who was part of a panel on the second episode of the Investment Insight series presented by Professional Planner and MLC.

The third live broadcast in the Investment Insight series on Tuesday November 10 at noon will feature a discussion with portfolio managers Leo Barry from Fairview Equity Partners and John Woods from MLC alongside Felicity Thomas, a senior private wealth adviser with Shaw & Partners. Please reserve your digital pass today to be part of the conversation.

“Valuations are at levels that feel kind of atmospheric for many of the high-profile businesses,” Kim said.

The panel members discussed how the pandemic exacerbated price distortion in a top-heavy US market dominated by ‘FANG’ stocks Facebook, Amazon, Netflix and Google.

MLC global equity portfolio manager Myooran Mahalingam said that while there is always uncertainty in the market, the current environment seems “particularly acute”.

Mahalingam explained that while the top five stocks in the S&P500 are up 39 per cent in the year to date, the rest of the index is only up 6 per cent. “So you are seeing a bifurcation in the market rewarding those beneficiaries of the current economy,” he added.

These top five companies make up roughly 20 per cent of the entire index, noted Willis Towers Watson’s Jessica Melville.

“That’s quite an interesting statistic, but what it says is that whenever you buy the index you’re buying a fifth of that in the top five stocks which is very tech biased, and these companies are now the subject of anti-trust regulation, which is a risk.”

The margin for error in these tech companies is already slim, Kim explained. The incoming anti-trust regulation that has the potential to reduce the power of these US companies only compounds doubt about the investment sanctity of the top end of the market.

This uncertainty around big tech stocks places more importance on cautiously sifting through indexes for smaller companies that offer quality with an appropriate modicum of risk, Kim said.

“One of the lessons we’ve learnt as active managers in this space over the year is in periods like this where there is heightened level of uncertainty the market ultimately rewards those businesses that can provide some level of certainty,” he said, adding that those businesses are usually the ones that benefit from “long-term structural tail-winds“ and have business teams “with the experience to weather through the cyclical volatility of a storm”.

Melville agreed, adding that Willis Towers Watson is looking at strategies that have less “macro-economic uncertainty”, even if that means straying from equities to alternative credit options or the hedge funds space.