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Pat yourself on the back. You have nearly made it to halfway through 2023. This has not been the easy ride in markets that investors had been hoping for after a grim 2022, to put it mildly. And as people take stock on their views and their portfolios, the message coming through is one of bafflement and extreme caution.
Stocks are up, sure. By nearly 16 per cent in the US, no less. But the dominance of a tiny clique of stocks and of the hype wave on artificial intelligence is giving many investors pause.
Meanwhile, the lack of a nice, steady macroeconomic narrative is unnerving fund managers, who love to hang a portfolio strategy on a reliable view. Sadly for them, that is proving elusive. So we have ended up with pessimists who cannot understand why the recession has failed to arrive and optimists who feel like they are running their luck.
One senior bond trader at a bank in London told me recently that after repeatedly stepping on rakes so far this year, many fund managers are losing confidence. First, the consensus was for a peak in inflation that would prompt the US Federal Reserve to start preparing to cut interest rates. Then along came January’s blowout jobs data to hurl that view out of the window.
Just as investors had shifted to anticipate much higher Fed rates instead, a US regional banking crisis caught some of the smartest minds in macro off guard and sent rate expectations, and bond yields, cratering.
“Everyone was scrambling to change position,” the trader said. “There were some scary moments when Treasuries were not functioning.”
Now, many fund managers in this core market appear to have given up. Recent market conditions have been “terrible for us”, he said. Clients are reluctant to place bets, they are unconvinced on direction and they are trading less than usual.
This reticence is evident across various asset classes. Notably, it was one of the nails in the coffin of what had been touted as London’s blockbuster stock market listing of the year.
WE Soda, the Turkish producer of soda ash (used to make batteries and detergents, among other things) had been planning to launch shares on to the public markets as soon as this month. This is what the London market does best — it serves as a neutral home in a major financial hub for emerging-markets companies in the resources business.
Bankers working on the deal had high hopes that generous dividends and a compelling business story would get this deal over the line. More than that, in fact: it would have been a $7.5bn deal, big enough to get WE Soda included in the FTSE 100 index. But this week, the transaction fell apart, invoking a terse reaction from the company, which had set up its own listing as a major test for London’s efforts to revitalise its stock market. “This question is this issue of caution in terms of the IPO market and what discount they demand for that caution,” said chief executive Alasdair Warren.
In this case, the discount was about 30 per cent below what the company was looking for. That is a huge, unbridgeable gap, and clearly the bankers behind the deal will need to take some responsibility for it. But one of them said would-be investors were not just “cautious”. Instead, they are “quite scared”.
“There’s career risk if you buy something and it goes down 12, 15 per cent,” this person said. This year has so far brought a grand total of five new stock market listings in London — a drab tally. And high-profile listings over the past few years have left investors reeling. THG listed in September 2020. Since then it is down 90 per cent. Deliveroo has fallen 64 per cent since it listed in March 2021. Dr Martens is down 70 per cent. You get the idea.
No one, it seems, wants to be the fund manager hauled up in front of an investment committee to explain why they took a punt on this latest offering. Never underestimate how far investors will go to avoid looking daft in front of their boss.
For Fabiana Fedeli, chief investment officer for equities, multi asset and sustainability at M&G Investments, taking calculated risk has to be the answer to navigating through this tricky 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 strokes investing’ — taking directional macroeconomic calls and swinging entire portfolios one way or the other,” she said in a note this week.
Predicting the timing of any economic recession remains a fool’s errand. Instead, Fedeli said, stock selection is the way to eke out returns beyond those on offer from wide indices.
“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 said. “In our view, the market offers attractive opportunities for bottom up, fundamental investors who are willing to dig a little deeper . . . Volatility has to necessarily become our friend.” That is easier said than done.
katie.martin@ft.com
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