- Tony Gentile/Reuters
Investors are turning into tourists, and just like the worst of tourists, they’re stomping over the locals.
According to Luke Hickmore of Aberdeen Investments, tourists are defined by two things: unfamiliarity and a short-term stay.
We have highlighted the need for investors to try out different asset classes because of low yields, but crowding isn’t the issue for Hickmore – it’s how long these investors stick around.
“It’s a bit like the old game of a brick and an elastic band – you can stretch it so far before it hits you in the face,” Hickmore, whose firm manages $428 billion in assets, told Business Insider this week. “It’s the same, if you’re pushed out of your natural comfort zone into riskier assets in terms of volatility, but it looks OK for now. As soon as your market you’ve come out of settles down and gives you returns that you normally expect, you’ll go straight back.”
This sort of movement will disrupt the markets in which these “tourist” investors rush in and out of.
Additionally, much like a tourist in an unfamiliar city, these investors aren’t fully comfortable or familiar with the risks, and particularly the volatility, of the assets they’re taking on to get the yield.
“They’re a tourist in the sense that they are there [in riskier assets] temporarily, but they are also tourists because they also don’t really get what’s happening,” Hickmore told Business Insider.
This can affect both corporate behavior, as these investors demand more shareholder returns, and volatility in the market.
The biggest fear, Hickmore said, is that these tourists could be left stranded in a foreign asset class.
“Where is your safe haven?” Hickmore said. “If there is an economic or market shock, where do you go?”
In this scenario, these investors have reallocated their portfolio toward more risk, and some sort of market or economic downturn hurts them more than if they had continued a typical allocation.
Hickmore doesn’t think market tourism is going away anytime soon, because the pricing of many “safer” assets doesn’t allow investors to get the returns they want or need.
So while they’re not taking pictures or looking over a map, the market tourists may be sticking around for some time.