Pat yourself on the back. 2023 is almost half way through. To put it mildly, after a grim 2022, this is not the easy market investors have been hoping for. As people evaluate their views and portfolios, the message is one of confusion and extreme caution.
Stocks rose, of course. In the U.S., it’s nearly 16 percent, no less. But the dominance of a small group of stocks and the wave of hype surrounding artificial intelligence have left many investors hesitant.
At the same time, the lack of a good, stable macroeconomic narrative has unnerved fund managers, who like to hang their portfolio strategies on solid views. Sadly for them, it proved elusive. So we end up with pessimists who can’t understand why a recession never came, and optimists who feel like they’re taking their chances.
A senior bond trader working for a bank in London recently told me that many fund managers are losing faith after commissions have been repeatedly stampede so far this year. First, the consensus is that inflation has peaked, which would prompt the Fed to start preparing for rate cuts. Subsequent blowout job data in January threw that view into the air.
Just as investors turned to expect much higher Fed rates, a regional U.S. banking crisis caught some of the brightest minds in macro off guard, sending rate expectations and bond yields plummeting.
“Everyone is scrambling to change positions,” the trader said. “There are some scary moments when U.S. national debt doesn’t work.”
Now, many fund managers in this core market appear to have given up. Recent market conditions have been “bad for us,” he said. Clients are reluctant to place bets, they are unsure of direction, and they are trading less than usual.
This silence is evident across asset classes. Notably, it is one of the nails in the coffin of what is being touted as London’s blockbuster stock market listing of the year.
WE Soda, a Turkish producer of soda ash (used in batteries and cleaners, among other things), has been planning to take its shares to the public market as soon as this month. That’s what the London market does best – it acts as a neutral home for emerging market companies in the resources sector in major financial centres.
Bankers working on the deal had high hopes that a fat dividend and a compelling business story would make the deal a success. In fact, more than that: it would be a $7.5 billion deal, enough to get WE Soda included in the FTSE 100 index. But this week, the deal fell apart, prompting a brief reaction from the company, which had made its listing a major test of London’s efforts to revive its stock market. “The question is about caution in the IPO market, and the discount they’re asking for that caution,” Chief Executive Alasdair Warren said.
In this case, the discount was about 30% lower than what the company was asking for. That’s a huge, unbridgeable chasm, and clearly the bankers behind this deal need to take some responsibility for it. But one of them said potential investors were not just “cautious”. Instead, they were “very scared”.
“If you buy something and the price drops 12% or 15%, there is an occupational risk,” the person said. There have been five new listings in London so far this year – a flat number. High-profile listings over the past few years have taken investors by surprise. THG went public in September 2020. Shares have since fallen 90%. Deliveroo shares are down 64% since listing in March 2021. Dr Martens shares are down 70%. you understood.
No one seems to want to be a fund manager and be pulled before an investment committee to explain why they are betting on this latest offering. Never underestimate the extent to which investors will go to avoid looking stupid to their bosses.
For Fabiana Fedeli, chief investment officer for equities, multi-asset and sustainability at M&G Investments, calculated risk has to be the answer to navigating this tricky economic environment, but it’s precisely in that space — in individual stocks — that it’s not Big and bold views. “We stand by our stance that this is not a market for ‘investing in the rough’ – taking directional macroeconomic forecasts and tweaking the entire portfolio one way or another,” she said in a note this week.
Predicting the timing of any recession remains futile. Rather, stock picking is the way to earn returns beyond what broad indexes offer, Fedeli said.
“The above-average variance in returns between and within industries reinforces our belief that selection is the way to achieve (extra returns) in the current environment,” she said. “In our view, the market presents an attractive opportunity for bottom-up fundamental investors who are willing to dig deeper . . . Volatility must be our friend.” Easier said than done.
katie.martin@ft.com