Investor Caution and the Challenges of 2023

The Uneasy Ride in the Markets

Give yourself a pat on the back. You’re almost into the middle of 2023. This hasn’t been the easy ride in the markets investors were hoping for after a dismal 2022, to put it mildly. And while people take stock of their opinions and their wallets, the message that arrives is one of bewilderment and extreme caution.

The Dominance of Select Stocks

Stocks are up, sure. Of nearly 16 percent in the United States, no less. But the dominance of a little clique of stocks and the wave of hype around artificial intelligence is giving many investors pause.

Lack of a Stable Macroeconomic Narrative

Meanwhile, the lack of a nice and stable macroeconomic narrative is unnerving fund managers, who like to base portfolio strategy on a reliable view. Unfortunately for them, this is proving elusive. So we end up with pessimists who can’t figure out why the recession hasn’t come and optimists who feel like they’re running their luck.

Growing Loss of Confidence

A senior bond trader at a London bank told me recently that after repeatedly stepping on the rakes so far this year, many fund managers are losing confidence. First, the consensus was for a spike in inflation that would prompt the US Federal Reserve to start preparing to cut interest rates. Then came blasting January jobs data to hurl that view out the window.

The Shifting Investor Sentiment

Just as investors moved to anticipate much higher Fed rates, a regional US banking crisis caught some of macro’s smartest minds off-guard and sent rate expectations and bond yields plummeting. “Everyone was scrambling to switch positions,” the trader said. “There were some scary moments when Treasuries didn’t work.”

Fund Managers Giving Up

Now, many fund managers in this core market appear to have given up. Recent market conditions have been “terrible for us,” she said. Clients are reluctant to place bets, are unconvinced by management and trade less than usual.

Reticence Across Asset Classes

This reticence is evident across various asset classes. In particular, it was one of the nails in the coffin of what had been touted as London’s best-selling stock market quote of the year.

The Collapse of WE Soda’s IPO

WE Soda, the Turkish producer of soda ash (used to make batteries and detergents, among other things) was planning to launch shares in public markets as early as this month. The bankers working on the deal had high hopes that generous dividends and a compelling business story would take this deal over the edge. But this week, the transaction fell apart, prompting a sharp reaction from the company, which had set up its own listing as a major test for London’s efforts to revitalize its stock market.

Fund Managers’ Fear and Caution

In this case, the discount was about 30% less than what the company requested. This is a huge and unbridgeable gap, and clearly the bankers behind the deal will have to bear some responsibility. But one of them said would-be investors weren’t just “cautious.” Instead, they are “pretty scared”.

The Fear of Career Risk

“There’s career risk if you buy something and it goes down 12.15 percent,” this person said. So far this year, he has brought a combined total of five new IPOs in London – a dreary number. And high-profile listings in recent years have left investors reeling.

The Need for Calculated Risk-Taking

For Fabiana Fedeli, chief investment officer for equities, multi-asset, and sustainability at M&G Investments, taking calculated risks must be the answer to navigating this difficult economic environment, but precisely in that space – in individual stocks – rather than with big, bold views. “We stand by our position that this is not a market for ‘broad investing’ – accepting directional macro calls and swinging entire portfolios one way or the other,” she said in a note this week.

The Power of Stock Selection

Predicting the timing of any economic downturn remains a fool’s endeavor. Instead, Fedeli said, stock selection is the way to outperform those offered by broad indices. “The above-average dispersion of returns both across and within sectors reinforces our belief that selection is the way to deliver [additional returns] in the current environment,” she said. “In our view, the market offers attractive opportunities for bottom-up, fundamental investors who are willing to dig a little deeper… Volatility needs to become our friend.” It’s easier said than done.

Additional Piece: Navigating a Volatile Market and Embracing Risk

In today’s investment landscape, marked by uncertainty and caution, fund managers and investors face numerous challenges. The volatility of the markets, the dominance of select stocks, and the lack of a stable macroeconomic narrative make it difficult to form reliable investment strategies. However, amid these challenges, there are opportunities for those willing to take calculated risks and navigate the market intelligently.

One of the key lessons from this year is that broad investing, based on directional macro calls, may not yield the desired results. Instead, focusing on individual stock selection can offer a higher chance of outperforming broad indices. The dispersion of returns across different sectors presents attractive opportunities for bottom-up, fundamental investors who are willing to look beyond the surface and dig deeper.

However, embracing risk in a volatile market requires a cautious and informed approach. Fund managers and investors must conduct thorough research, analyze the financial health and growth potential of companies, and consider potential risks and uncertainties. It is crucial to diversify investments to mitigate risks and avoid being too reliant on a few stocks or sectors.

Furthermore, staying updated with market trends, news, and developments is essential. The ability to react quickly to market changes and adjust investment strategies accordingly can help investors navigate turbulent times. The importance of building a network of trusted advisors, analysts, and industry experts cannot be underestimated, as their insights and expertise can provide valuable guidance.

While volatility can be unsettling, it is important to remember that it also presents opportunities. Volatility allows for buying stocks at discounted prices and taking advantage of market swings. However, it is crucial to approach this with caution and not let fear dictate investment decisions. A well-thought-out investment strategy, based on research and analysis, can help investors make informed decisions rather than succumbing to emotional reactions.

In conclusion, the challenges faced by investors in 2023 require a shift in investment strategies. While the markets may be uncertain, embracing risk through carefully selected individual stocks can yield better returns than broad investing. Navigating a volatile market requires a cautious and informed approach, encompassing thorough research, diversification, staying updated, and avoiding emotional reactions. By understanding and adapting to the current market conditions, investors can position themselves for success despite the challenges they may face.

katie.martin@ft.com

Summary:

The investment landscape in 2023 has proven to be challenging, with market volatility, the dominance of select stocks, and a lack of stable macroeconomic narrative causing caution among fund managers and investors. This environment has led to a loss of confidence and reluctance to place bets. Even the London stock market, known for its lucrative opportunities, has faced setbacks, such as the collapse of WE Soda’s initial public offering (IPO).

Investors are cautious and even scared due to the risk involved in the current market conditions. The fear of career risk and previous high-profile listings that have left investors reeling have made fund managers reluctant to take risks. However, some experts believe that calculated risk-taking, specifically through individual stock selection, can offer opportunities for outperforming broad indices.

Fabiana Fedeli, CIO for equities, multi-asset, and sustainability at M&G Investments, suggests that stock selection is the way to deliver additional returns in the current environment. The market offers attractive opportunities for investors who are willing to dig deeper and embrace volatility. However, navigating a volatile market requires a cautious and informed approach, with thorough research, diversification, staying updated, and avoiding emotional reactions.

In conclusion, while the challenges of the current investment landscape are significant, there are opportunities for those willing to take calculated risks and approach the market intelligently. Embracing risk through individual stock selection can yield better returns, but it requires a cautious and informed approach. By understanding and adapting to the current market conditions, investors can position themselves for success despite the challenges they may face.

Give yourself a pat on the back. You’re almost into the middle of 2023. This hasn’t been the easy ride in the markets investors were hoping for after a dismal 2022, to put it mildly. And while people take stock of their opinions and their wallets, the message that arrives is one of bewilderment and extreme caution.

Stocks are up, sure. Of nearly 16 percent in the United States, no less. But the dominance of a little clique of stocks and the wave of hype around artificial intelligence is giving many investors pause.

Meanwhile, the lack of a nice and stable macroeconomic narrative is unnerving fund managers, who like to base portfolio strategy on a reliable view. Unfortunately for them, this is proving elusive. So we end up with pessimists who can’t figure out why the recession hasn’t come and optimists who feel like they’re running their luck.

A senior bond trader at a London bank told me recently that after repeatedly stepping on the rakes so far this year, many fund managers are losing confidence. First, the consensus was for a spike in inflation that would prompt the US Federal Reserve to start preparing to cut interest rates. Then came blasting January jobs data to hurl that view out the window.

Just as investors moved to anticipate much higher Fed rates, a regional US banking crisis caught some of macro’s smartest minds off-guard and sent rate expectations and bond yields plummeting.

“Everyone was scrambling to switch positions,” the trader said. “There were some scary moments when Treasuries didn’t work.”

Now, many fund managers in this core market appear to have given up. Recent market conditions have been “terrible for us,” she said. Clients are reluctant to place bets, are unconvinced by management and trade less than usual.

This reticence is evident across various asset classes. In particular, it was one of the nails in the coffin of what had been touted as London’s best-selling stock market quote of the year.

WE Soda, the Turkish producer of soda ash (used to make batteries and detergents, among other things) was planning to launch shares in public markets as early as this month. This is what the London market does best: it serves as a neutral venue in a major financial center for emerging market companies in the resource sector.

The bankers working on the deal had high hopes that generous dividends and a compelling business story would take this deal over the edge. More, in fact: It would have been a $7.5 billion deal, big enough to include WE Soda in the FTSE 100 index. But this week, the transaction fell apart, prompting a sharp reaction from the company, which had set up its own listing as a major test for London’s efforts to revitalize its stock market. “This question is this question of caution in terms of the IPO market and what discount they require for that caution,” Chief Executive Alasdair Warren said.

In this case, the discount was about 30% less than what the company requested. This is a huge and unbridgeable gap, and clearly the bankers behind the deal will have to bear some responsibility. But one of them said would-be investors weren’t just “cautious.” Instead they are “pretty scared”.

“There’s career risk if you buy something and it goes down 12.15 percent,” this person said. So far this year he has brought a combined total of five new IPOs in London – a dreary number. And high-profile listings in recent years have left investors reeling. THG listed in September 2020. It has since fallen 90%. Deliveroo is down 64% since it went public in March 2021. Dr Martens is down 70%. Did you understand.

No one, it seems, wants to be the fund manager dragged before an investment committee to explain why they gambled on this latest offering. Never underestimate how far investors will go to avoid looking stupid in front of their boss.

For Fabiana Fedeli, chief investment officer for equities, multi-asset and sustainability at M&G Investments, taking calculated risk must be the answer to navigating this difficult economic environment, but precisely in that space – in individual stocks – rather than with big, bold views. “We stand by our position that this is not a market for ‘broad investing’ – accepting directional macro calls and swinging entire portfolios one way or the other,” she said in a note this week.

Predicting the timing of any economic downturn remains a fool’s endeavour. Instead, Fedeli said, stock selection is the way to outperform those offered by broad indices.

“The above-average dispersion of returns both across and within sectors reinforces our belief that selection is the way to deliver [additional returns] in the current environment,” he said. “In our view, the market offers attractive opportunities for bottom-up, fundamental investors who are willing to dig a little deeper… Volatility needs to become our friend.” It’s easier said than done.

katie.martin@ft.com