Stimulus-driven share rebound could lead to heartache

Investors should be wary of investing in stocks that have rebounded sharply since the introduction of government stimulus packages around the world, according to the chief investment officer of Wingate Asset Management, Chad Padowitz.

Investors might have been hoodwinked by all the “free money” and stimulus that had gone around the world, and there was a chance that if the stimulus were reversed, the markets would go back into a very bad state, Padowitz said.

“If you give a dying patient a shot of adrenaline, they can jump up and run ... but it doesn’t mean that the patient is okay,” he said.

“If you add all the extra cars being sold [because of government stimulus packages] that does amazing things for the steel price and the iron ore price, and that affects valuations of commodity companies, [and] all those things are coming to an end over the next 12 months.”

Wingate was very hesitant to price in a recovery that might not actually be there, Padowitz said.

Investors should avoid consumer discretionary and cyclical stocks that were “recovery stocks” and had shot up significantly in the market, because there was a real risk that the revenue and demands supporting those earnings ratios were not sustainable, he said.

The demand was not the real demand of risk capital from investors, but global governments throwing money down which had to show up somewhere, Padowitz said.