Stock market
What the world can do without right now is set the stage for another 'tulip mania'. But mom-and-pop investors are setting off prices surges in unknown stocks. They should know better. Image Credit: Agency

London: 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 Inc. to Nikola Corp. having seen their stock prices surge many-fold - 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."

A wild goose chase

With the S&P 500 up more than 30 per cent 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.

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 advises holding some cash and government bonds to protect against potential volatility.

Running high on fumes

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. 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 Group Inc.

And while expected earnings of their top picks may not always justify their surging stock prices, many retail investors are encouraged by the US Federal Reserve's stimulus measures and economic bounce after the lockdowns were eased.

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."

Stock market 2
The Robinhood kind of trading apps have a lot to answer for generating stock market gains even as economies are in a freefall. Image Credit: Agency