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Rich clients should leave stock bubbles to the day traders, UBS says

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The world’s largest wealth manager has a message for any clients tempted to follow day traders into some of the equity market’s more exotic stocks in search of a fast buck: don’t even go there.

With little-known companies from Fangdd Network Group to Nikola having seen their stock prices surge manyfold — sometimes in a matter of just days or hours — during the recent market rally, UBS Global Wealth Management’s Charles Day says rich clients should stick to safer names.

“The stocks that I hadn’t heard of three months ago all of a sudden are the most active — that’s not where investors go, that’s where traders might go or hobbyists might go,” said Day, a managing director and private wealth adviser at the Swiss firm, which oversees $2.3 trillion in assets. “If you’re a wealthy investor, you have to avoid thinking that you’re missing out on huge returns in these stocks.”

With the S&P 500 up more than 30% since hitting March lows, the fear-of-missing-out is fueling buying by day traders, such as those on the commission-free brokerage Robinhood, who pounce on companies with little or no profit and send their stock price surging. With mom and pop investors opening record numbers of new trading accounts, Wall Street pros are trying to figure out to what degree retail appetite has become a self-fulfilling prophecy in many parts of the market and what risks it poses to the rally.

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In the face of rising concerns about the pace of economic recovery and the risk of a second wave of infections, Day recommends that clients focus on blue-chip growth stocks in retail and technology with steady cash flows as well as seeking opportunities in cheaper value shares. He also advises holding some cash and government bonds to protect against potential volatility.

Reflecting on an increasing incidence of skyrocketing stocks, Day draws comparison with the 2000 market crash “when obscure companies were doubling and tripling monthly,” he said in a phone interview. One day last week, shares of Fangdd, a smallish Chinese real-estate firm, shot up 13-fold in a vacuum of news, taking its market capitalization to $4 billion. In only a few days, that value has fallen back below $1 billion.

“If you’re very wealthy, what you want to have is some protection of your downside so you feel more comfortable with your risk assets,” Day said.

But just because day traders are a more frequent presence and don’t have professional training, doesn’t mean they’re wrong. So far, the lion’s share of their trades have been money makers and their favorites are handily beating those liked by hedge funds and mutual funds, according to Goldman Sachs. And while expected earnings of their top picks may not always justify their surging stock prices, many retail investors are encouraged by the U.S. Federal Reserve’s stimulus measures and economic bounce after the lockdowns were eased.

Goldman strategists said in a note on Friday that small trades in the U.S. options market have spiked this year thanks to increased retail investor participation. And since this group holds elevated levels of cash, they have more dry powder to put to use, which coupled with bearish positioning among institutional investors increases the chances of higher returns in stocks, according to Goldman.

Still, Day warns that mom and pop traders are at risk of getting swept away by market volatility in some of the smaller names.

“That’s what makes it extremely vulnerable to extreme volatility, is that people going into those trades don’t have a lot of experience and now they’re going to start to think it’s easy and that’s a dangerous place to be,” he said. “The Robinhood names I think are almost all froth.”

--With assistance from Marion Halftermeyer, Joanna Ossinger, Sarah Ponczek and Vildana Hajric.

Bloomberg News