One week / one topic: Open minds

What happened?

Last week, we held our internal ‘Global Macro Forum’ – an internal-only, two-day event where fund managers from across the firm come together to exchange views about markets.

Wait: a chance to geek out for two days with your fellow finance nerds, you say? Sign me up!

This time around, we focused on the following topics:

• A momentous time for global markets, and specifically looking at the convergence of a peculiar growth/inflation mix, geopolitics and debt dynamics

• Dispersion of equity returns and its concomitant opportunities and risks

• Credit as an often-overlooked asset class within a macro context

• Emerging markets outlook across asset classes

When facilitating the session on the dispersion of equity returns, I began by asking two questions:

1. How do return differentials for equity sectors or countries compare to ‘stocks vs bonds’, which is usually top-of-mind for macro investors?

2. What do opportunities in this space look like, and how can you have an edge?

As highlighted in the bottom two rows below, return differentials across global equity sectors are indeed comparable in size to ‘stocks vs bonds’:

The same is true for equity country indices, again highlighted in the bottom two rows:

(Source: Bloomberg as of 28/11/24, Global stocks = MSCI World Total Return, Global government bonds = Bloomberg Global Agg Treasuries Total Return Index Value Unhedged USD, MSCI World sector indices, main country indices)

This is particularly relevant today as ‘US exceptionalism’ is the talk of the town, and yet we should remind ourselves that indeed nothing lasts forever…:

As for the second question – How can you have an edge in this game? – where do the above observations lead us?

Our observations

• Fundamentals: US valuations have been much more expensive than anywhere else for a long time now (see below), and yet these stocks keep outperforming. What gives?

• Price action: European stocks have recently experienced some of the worst underperformance on record, and similarly for EM. Have we (finally) reached ‘overdone’ levels?

• Investor beliefs: Nvidia stock ownership is common dinner table talk in the US: not as in ‘should you own some?’, but more along the lines of ‘when did you buy yours?’ and ‘are you buying more?’

So what?

Markets have been showing us that ‘cheaper valuations’ are not enough to drive outperformance over any timeframe other than the (very) long term.

However, in the meantime investors must contend with a structurally wider underlying distribution of potential outcomes.

In other words: politics matter, and office holders today are a lot less likely to follow the old orthodoxy.

Starting with the US, the Washington consensus is dead and buried.

Still unconvinced? Watch this.

So, we are once again reminded that we should attempt to understand the present and react to it – as opposed to trying to guess an unknowable future.

Getting on the right side of equity dispersion can indeed pay off handsomely…

For example, Turkish stocks outperformed global equities by 134% in 2022 (USD terms), boosted – at least in hindsight! – by meaningful changes in local economic and monetary policies.

Putting it all together, we maintain therefore our usual ‘patient opportunism’ stance once more…

Mood music: Incubus - Drive