For individual investors in the UK

Stock pickers at the end of the free money era

Portfolio Manager Luke Newman explores what a change in market dynamics means for long/short investors.

Luke Newman

Luke Newman

Portfolio Manager


29 Mar 2023
3 minute watch

Key takeaways:

  • Recessionary pressures and the risk of a higher default cycle have led to a change in investor appetite and an end to the speculative excesses we have seen over the past few years.
  • A return to higher dispersion levels between the pricing for individual securities presents an opportunity for stock pickers to re-introduce valuation techniques that have been sidelined over much of the past decade.
  • Higher dispersion levels represent a particularly attractive environment for long/short investors able to distinguish between those businesses thriving, and those that are struggling.

Changes in investment paradigm and new regimes for market structure are not common events, but it has become clear over the last six or seven months that we have seen a new period for markets and for economies. The dormant levels of inflation of the last decade seem to be behind us, and we have entered a new period that comes with lots of consequences for economies as well as investing.

The chances of a default cycle, recessionary pressures are now very real. We’ve seen investor appetite change and the speculative excesses of the last few years, again feel behind us. Financing rates are now higher, but the strong sense we have and when we look back to earlier points in our investment careers is that this is a much more normal environment to be investing within.

Within equity markets, what we have seen is a return to higher dispersion levels between individual securities and with it the opportunity for stock pickers to be able to employ valuation techniques and approaches that over much of the last decade have been relegated and replaced really with a single objective of managing to a single factor – that dominant growth style factor which has dominated markets for so long.

The question now turns to the persistency of this new regime. How long will these new dynamics last within equity and fixed income markets?

Our strong sense is that all policy makers in the western world, in particular central banks and governments, are keen to move away permanently from this era of free money and zero interest rates. And there is a determination, even if we do see pressure on gross domestic product (GDP) and recessionary forces to not return to a period of negative or zero interest rates going forward.

It is clear, I think, to all of us now that there have been unintended consequences, both economic and social, in terms of inequality trends that have been caused by these policies, and a return, again to a more normal form of investment allocation of resources, would seem to be preferable. If we are right in terms of that assertion, this improvement in opportunity set we have seen for stock pickers, particularly for long/short investors who can benefit from deteriorating conditions as much as those businesses and companies thriving in this environment should continue to be very strong indeed, and importantly, much improved on what we have seen for much of the last decade.

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Glossary:

Inflation: The rate at which the prices of goods and services are rising in an economy. The CPI (consumer price index) and RPI (retail price index) are two common measures.

 Recession: A significant and prolonged downturn in economic activity, commonly considered to be at least two consecutive quarters of falling GDP (gross domestic product).

Default/default cycle: The failure of a debtor (such as a bond issuer) to pay interest or to return an original amount loaned when due. A period in the market cycle when default levels are increasing in response to more difficult economic conditions.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

Marketing Communication.

 

Glossary

 

 

 

Important information

Please read the following important information regarding funds related to this article.

The Janus Henderson Fund (the “Fund”) is a Luxembourg SICAV incorporated on 26 September 2000, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
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  • When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund involves a high level of buying and selling activity and as such will incur a higher level of transaction costs than a fund that trades less frequently. These transaction costs are in addition to the Fund's Ongoing Charges.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund involves a high level of buying and selling activity and as such will incur a higher level of transaction costs than a fund that trades less frequently. These transaction costs are in addition to the Fund's Ongoing Charges.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Luke Newman

Luke Newman

Portfolio Manager


29 Mar 2023
3 minute watch

  • Recessionary pressures and the risk of a higher default cycle have led to a change in investor appetite and an end to the speculative excesses we have seen over the past few years.
  • A return to higher dispersion levels between the pricing for individual securities presents an opportunity for stock pickers to re-introduce valuation techniques that have been sidelined over much of the past decade.
  • Higher dispersion levels represent a particularly attractive environment for long/short investors able to distinguish between those businesses thriving, and those that are struggling.