Congratulations on making it almost halfway through 2023. It’s safe to say that the markets haven’t been as smooth as investors had hoped after a challenging 2022. As people take stock of their views and portfolios, there’s a widespread feeling of confusion and extreme caution.
Stocks have seen an increase of nearly 16% in the US, which is certainly positive. However, the dominance of a small group of stocks and the hype surrounding artificial intelligence have made many investors think twice.
Additionally, the absence of a clear macroeconomic narrative is unsettling fund managers who prefer a reliable viewpoint to base their portfolio strategies on. Unfortunately, such a viewpoint has proven elusive. As a result, we have pessimists who can’t comprehend why a recession hasn’t occurred and optimists who feel like they’re pushing their luck.
A senior bond trader at a London bank recently shared with me that many fund managers are losing confidence after consistently stumbling this year. Initially, there was a consensus that inflation would peak and prompt the US Federal Reserve to prepare for interest rate cuts. However, January’s exceptional job data shattered that view. Just as investors adjusted to anticipate higher Fed rates, a banking crisis in the US caught macro experts off guard and sent rate expectations and bond yields plunging.
“Everyone was scrambling to change position,” the trader remarked. “There were some scary moments when Treasuries were not functioning.”
At this point, numerous fund managers in the core market have given up. Recent market conditions have been “terrible for us,” said the trader. Clients are hesitant to make bets, they lack conviction in terms of direction, and trading volume has decreased.
This hesitance is evident across various asset classes and played a role in derailing what was supposed to be London’s most significant stock market listing of the year. WE Soda, a Turkish producer of soda ash, had planned to launch its shares to the public this month. London’s market excels at serving as a neutral home for emerging market companies in the resources sector.
The deal’s bankers were optimistic that strong dividends and a compelling business story would ensure its success. Furthermore, it would have been a $7.5 billion deal, making WE Soda eligible for inclusion in the FTSE 100 index. Unfortunately, the transaction fell apart this week, prompting a terse response from the company, which had viewed the listing as a significant test for London’s stock market revival efforts. CEO Alasdair Warren raised concerns about the caution displayed by investors and the discount they demanded for that caution.
In this case, the discount amounted to approximately 30% less than what the company had hoped for. It’s a substantial and insurmountable gap, and the deal’s bankers must take some responsibility for it. However, one of the bankers revealed that potential investors weren’t just “cautious”; they were “quite scared.”
“There’s career risk if you buy something and it goes down 12, 15 percent,” the banker explained. This year, London has only seen a total of five new stock market listings, which is unimpressive. Moreover, high-profile listings in recent years have left investors reeling. For example, THG listed in September 2020 and has since dropped by 90%. Deliveroo, which listed in March 2021, has fallen by 64%. Dr. Martens is down 70%. Needless to say, no one wants to be the fund manager called in front of an investment committee to justify a risky investment. Investors will go to great lengths to avoid looking foolish in front of their superiors.
Fabiana Fedeli, the Chief Investment Officer for Equities, Multi-Asset, and Sustainability at M&G Investments, believes that calculated risk-taking is the key to navigating this challenging economic environment. However, she advises focusing on individual stocks rather than relying on bold macroeconomic predictions. “We stand by our position that this is not a market for ‘broad strokes investing’—taking directional macroeconomic calls and swinging entire portfolios one way or the other,” she stated in a recent note.
Predicting the timing of an economic recession is a fruitless endeavor. Instead, Fedeli suggests that stock selection is the path to achieving returns beyond what broad indices offer. “Higher-than-average return dispersion both between and within sectors reinforces our belief that selection is the way to deliver additional returns in the current environment,” she added. “In our view, the market offers attractive opportunities for bottom-up, fundamental investors who are willing to conduct thorough research. Volatility must become our ally.” However, that is easier said than done.
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