Leading investment managers share their views on the investment challenges and opportunities ahead, as well as their investment and personal New Year resolutions.
Developments in politics, economics, demographics and technology could all induce erratic investor sentiment in 2019 – ultimately causing short-term doubt and poor decision-making.
We ask Hannah Gray from BlackRock’s Active Equity Group, and Nick Kirrage and Kevin Murphy from Schroders’ Global Value team, where investors can positively focus their attentions to uncover the best long-term opportunities. The fund managers share their favoured investment approaches, as well as their New Year resolutions – professional and personal.
Hannah Gray: The complexity of today’s global economy and incessant media coverage makes it easy for investors to get caught up in short term and cyclical market moves of despair and euphoria. Investors should instead not only pay attention to, but look for exposure to, longer-term trends that are impacting their portfolios and should position themselves for returns over a three-to-five year period through a diversified approach.
Examples of longer-term trends include how changing demographics and politics are impacting global growth and interest rate paths. Other such trends include how technology breakthroughs are driving growth and one specific example of this, that I’m personally very excited about today, is the electrification of vehicles.
Nick Kirrage and Kevin Murphy: Valuations. While a New Year will undoubtedly bring in new fads and tastes, we’ll remain emphatically focussed on cyclically-adjusted valuations. Why? Because since stock markets began, empirical evidence shows us that it’s the price you pay, not the growth you get, that’s the biggest determinant of investment returns - in all market environments.
Hannah Gray: Developments in 2019 will be key to understanding how the US government is responding to the rise of China’s emerging economic and military power. This mega-trend of the changing global economic balance was epitomised in 2018 by the US-China trade dispute which has the potential to lead to a fear-fuelled slowdown.
2019 will shed light on how politics and technology coexist with potential changes ahead around intellectual property protection and possible increased regulation. This will likely create opportunities for companies that have strong track records of successful research and development.
Nick Kirrage and Kevin Murphy: No one has a crystal ball; we can’t know what will happen tomorrow. This is why it’s vital to explicitly avoid taking economic views that might influence portfolio decisions. Some would question if it’s prudent to ignore factors like interest rates, inflation, unemployment, or thematic trends like emerging market growth or the negative outlook for consumer spending. While we are mindful of their impact, our style of recovery investing’s record of outperformance shows that an unemotional, valuation-based recovery approach delivers – regardless of these prevailing economic or thematic factors – over the long run.
Hannah Gray: Occasionally, investors are faced with structural shifts that are longer-term in nature and have irreversible consequences for the world around us. I believe the revolution we are seeing today in transport is one of these, with the world moving towards increasingly electric and autonomous cars. These trends represent a leap forward in productivity and safety for consumers and industry alike. They’ll impact a wide range of companies, creating a huge growth opportunity.
Elsewhere, the Chinese government appears to be stepping in to stimulate growth, after the country’s economic indicators have decelerated, and this could create an investment opportunity for companies exposed.
Nick Kirrage and Kevin Murphy: We’re purely bottom-up investors and have found value opportunities in a number of UK financials, notably Standard Chartered, Lloyds, RBS*. Unsurprisingly these are names that most of the market is running away from. Nonetheless, bank stocks have generally only been cheaper in early 2009 and late 2011 – at the height of systemic risk – and profitable new business is helping them build significant excess capital. For the time being, these robust profit margins remain masked by losses on legacy assets and exceptional charges. Over the longer term, however, we believe the ongoing improvement in their core businesses will warrant significant share price increases.
*Stocks mentioned are for illustrative purposes and not a recommendation to buy or sell
Hannah Gray: Over the past couple of years, I’ve been incorporating new sources of data into my investment idea generation process, such as supply chain data, as we, at BlackRock, have been investing in this area. In 2019, I hope to take this even further and, in particular, focus on data that gives me a more robust view of a company’s long-term competitive position.
Nick Kirrage and Kevin Murphy: To learn and improve. In investment, you must never rest on your laurels. We’ve honed our investment process over many years and it’s more rigorous today than it’s ever been, but there’s always room for improvement. To do this you must focus your efforts on specific parts of your process, and use your experience to explore all avenues for improvement. By way of example, we set up the Value Archive five years ago for precisely this purpose. The archive is a permanent record of our thoughts and analysis at a given point in time. Hindsight bias matters in investment because it gets in the way of learning from our experiences, and the Value Archive is a key tool to negate this.
Hannah Gray: The transition to a low-carbon economy is vital for the long-term health of our planet. I would therefore like to start lowering my carbon footprint by making some small changes. So, despite my love affair with barbeque food, I’m looking to cut down on my meat intake and progress from ‘Meat-free Mondays’ to two meat-free days a week.
Nick Kirrage and Kevin Murphy: The Value Team recently played Standard Life Investments’ multi-manager selection team in a friendly 5-a-side football fixture. I won’t mention the score … but our joint resolution here on the Value Team is to improve our 5-a-side skills!
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your client’s investment can go down as well as up and may be worth less than you paid in.
The information here has been provided by BlackRock and Schroders and is based on their understanding in December 2018.
Hannah Gray, CFA, Vice President and portfolio manager, is a member of the Natural Resources team within the Fundamental Equity division of BlackRock's Active Equity Group. She co-manages the BlackRock Commodity Strategies Fund and the BGF Future of Transport Fund.
Nick Kirrage and Kevin Murphy are Co-heads of the Global Value Team at Schroders, who manage the Schroder Recovery and Income Funds.