Weekly Market Update

What we are working on this week

August 28, 2023
Last week the InvestSense team spent much of the week preparing for and attending the Portfolio Construction Forum Strategies Conference.

Evaluating Managers: A Data-Driven Approach

One of the standout sessions at the PCF StrategiesConference was the discussion on evaluating managers. The session featured GregDean and Claire Finn Levy, who explored the question of whether there is abetter way to judge managers beyond traditional methods such as past performanceor subjective interviews.

ClaireFinn Levy, an expert in coaching managers and analysing their investmentdecision-making, presented a data-driven approach to manager evaluation. Sheemphasized the importance of quantifiable metrics such as hit rate, decisionquality, and payout analysis. This approach allows for a more objectiveassessment of managers, providing valuable insights into their decision-makingabilities.

Whilethis data-driven approach is not entirely new, Claire's process offers a uniqueway to quantify and analyse manager performance. The availability of suchinformation could potentially revolutionize how we evaluate and select managersin the future. However, it's important to be cautious and recognize thelimitations of relying solely on statistical metrics. The introduction of theSharpe ratio had its drawbacks - insurance or relative strategies can haveoutstanding Sharpe ratios, especially if calculated with a limited data setthat doesn’t include the inevitable pay-out, drawdown, or ‘fat-tail event’.Fund managers often control the data and the experience/performance historybeing marketed can look very different from the experience a few years down theline. So far this looks like something that could help us cut the wheat from thechaff but it’s not yet clear how it can be used across a wide variety ofstrategies.

 

The Rise of Artificial Intelligence in Portfolio Construction

Artificial intelligence (AI) was another prominenttheme at the PCF Strategies Conference. While it didn't receive as muchattention as expected, the discussions shed light on the challenges andopportunities surrounding the implementation of AI in portfolio construction.

Wewere somewhat surprised at the difficulty people are having in grasping theconcept of AI and its practical application. In particular, were think thescepticism of many in the audience stems from a lack of differentiation.Between generative AI, such as GPT models, and extractive AI needs to be madeclear. Generative AI involves creating new content from very broad andunstructured data sources, while extractive AI focuses on extractinginformation from a narrow, trusted data set.

Thediscussions highlighted the need for a better understanding of how AI it can beeffectively utilized in research and advisers’ practices. We think we can helpadvisors with some of the early low-hanging fruit and will be arranging awebinar for our clients on this subject in the next few weeks.

 

Geopolitics: A Key Factor in Portfolio Decision-Making

Geopolitics also took centre stage at theconference, with Vikram Mansharamani providing some striking insights into theglobal landscape. One of the key topics discussed was the potential decline ofthe US dollar as the world's reserve currency. Mansharamani highlighted thegrowing pushback from various countries and proposed the idea of the BRICScountries coalescing around a jointly-backed currency, potentially tied to gold.

Whilethe feasibility of such a currency remains uncertain, the implications of sucha shift would be significant. It could impact the value of the US dollar, USTreasury yields, and various other aspects of the global economy. Thisthought-provoking idea opens up a new avenue for portfolio managers to considerwhen making investment decisions.

 

Private Assets: Exploring New Investment Avenues

Private assets, including private debt and privateequity, were also extensively discussed at the conference. Severalpresentations focused on the potential benefits and risks associated withinvesting in these alternative asset classes.

Privateequity, in particular, was a topic that sparked debate and prompted furtherinvestigation. While some presentations painted a rosy picture of the assetclass, others raised critical questions. This has spurred us to critically analysenot only some of the assumptions in some of the presentations but also our own.Several Private debt presentations made a compelling case from a return-seekingperspective but we wonder whether many of these shadow banking strategies havereally been stress-tested in adverse economic scenarios or even in ahypothetical sense (as actual banks must do for the regulators). In the US the Securitiesand Exchange Commission has just kicked off a series of initiatives looking atpretty much the same thing. Expect white papers on the subject of both issuesin the near future. 

Ona slightly different tangent, one presentation suggested that an index approachto private equity could be a viable option, similar to what has beensuccessfully implemented in listed equities. This is a brave new world but, whoknows, maybe it could spark the same rationalisation of the industry that wehave seen in public equities. Key Insights from Thought-Provoking Sessions

 

Active Opportunities in listed equities

There were several there were presentationshighlighting the cyclical undervaluation of emerging markets and global smallcaps. The rotational nature of these markets during recessions was discussed,suggesting potential opportunities for investors although many portfolioconstruction professionals remained concerned that a recession scenario was notideal for these cyclical assets we continue to hope that enough people worryingabout that means it doesn’t happen and we get something more akin to thefollowing graph. Apologies for repeating ourselves with the following graph butwith all of this talk of recessions we are trying to maintain an optimistic andconstructive mindset! Who knows, stranger things have happened.

Still, forewarned is forearmed, and with Andrew Huntin town this week we hope to benefit from both attributes in equal measure.Next week we will report in more detail on his current thesis where inflationgives way to disinflation and potentially beyond into deflation.

Global Economic Sentiment Shifts as US Data Strengthens whilst Eurozone Data Weakens

August 2, 2024
Global economic sentiment shifted in the week as US data strengthened, and Eurozone data weakened. Weaker global economic data raised concerns about central bank hawkishness, leading to a stronger US dollar and weaker currencies. Crude oil prices remained resilient amid supply concerns, while tech stocks led US markets lower as Apple took a hit.
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US Markets Closed Flat, China Stabilizes, and the End of Monetary Tightening in Europe?

August 2, 2024
Despite higher-than-expected US CPI data, bond and equity markets remained calm initially. The jump in inflation was attributed to a temporary rise in energy prices and air travel. However, volatility set in due to the IPO of British chip maker ARM, pushing markets up by around 2%. Fears of a further rate hike set in causing US markets to close flat. Conversely, European, Australian, and UK markets ended the week positively, driven by the performance companies reliant on Chinese exports.
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Markets Slammed By Hawkish Rhetoric Despite Pause From The Fed

August 2, 2024
Equity markets around the world fell more or less in unison last week by about 3-4%, before bouncing slightly on Friday. The UK was really the only market to buck the trend, as the Bank of England unexpectedly kept rates on hold after inflation fell by more than forecast.
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Sticky Inflation Concerns Put Markets on the Back Foot

August 2, 2024
Last week markets were down again, reflecting the trends that took root in September - long-term yields pushing higher with markets on the back foot.
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Riding the Market Rollercoaster

August 2, 2024
If we had written this commentary early in the week as intended, we would have said that markets were still on the back foot, as they were down another few percent. However, having got to the end of this week things have improved quite a bit and most markets are now actually up a few percent, with China leading the way.
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Rising Rates Rattle Stocks as Geopolitical Risks Emerge

August 2, 2024
This week rates have headed resolutely upwards, and stocks have not liked it much with most markets heading steadily downwards throughout the week.
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Volatile ride continues as markets react to inflation data

August 2, 2024
The volatility continued last week, and when the roulette stopped at the end of the week the US was down by almost 2% and the Nasdaq by a bit more than 3% along with emerging markets (mainly weighed down by China).
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Whispers of a changing rates outlook

August 2, 2024
There was more volatility in markets last week, led again by US markets, driven in turn by US rate speculation.
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A strong month for markets

August 2, 2024
Markets capped a very strong month with a strong week and for an apparent kaleidoscope of reasons including not as dismal as expected earnings, anecdotal evidence of slowing inflationary pressures in the US and even some economic resilience in recession bound and energy starved Europe.
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US markets down while China leads the way

August 2, 2024
US markets snapped a month-long winning streak and fell back by three percent while UK, European and Asian markets were up strongly.
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An imploded crypto exchange, muted inflation and a better-than-expected result for the Democrats

August 2, 2024
Early last week it looked like an imploding crypto exchange might be the next leveraged player that the Fed hiking cycle had broken but by the end of the week early signs of a peak in inflation had sent markets rocketing higher.
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All eyes on the CPI

August 2, 2024
Most markets were soft but stable last week while US markets were down a more significant 3%, led by the large US tech stocks.
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Markets slid again last week, with a concentrated sell off in US tech

August 2, 2024
Markets slid again last week but the selling was concentrated in US tech, most of which is down 10% or so this year. Much of last week’s selling occurred in the last 2 sessions of the week.
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Recession fears build, yet equity markets end the week higher

August 2, 2024
Fears of a US recession later this year gathered pace last week and the US equity market jumped by almost 7% and the Nasdaq was up some 9%.
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Inflation - Flash Update

August 2, 2024
In light of the recent inflation data coming out of the US, we dive in to why the market is so upset about a 0.1% increase in prices, and what this means from an Australian investor's perspective.
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Interest rate sensitivity persists into the new year

August 2, 2024
During the last few weeks, the prospect of rising interest rate expectations continued to grip markets, as the soft landing/rapid disinflation thesis was tested.
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Strong start to the year continues despite recession concerns

August 2, 2024
As the world’s elite gathered in a snowless Davos, markets focused on much more immediate concerns, starting with the continuing wave of layoffs in corporate America. Amazon, Microsoft, Alphabet (Google’s parent company), Salesforce and Goldman Sachs, among others, took turns to announce staff cuts. It would appear boardrooms and CEOs are lending some credence to the possibility of a recession in 2023.
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Equities turbulent but resilient as interest rates rise

August 2, 2024
Last week the S&P 500 traded in a 3% range, having done a 2% round trip on Thursday, followed by a 3% fall on Friday after the inflation data release and then another almost 2% round trip yesterday. Emerging markets were the worst performing, down 4% for the week. Taking a step back though, most equity markets haven’t given back that much of their gains from January, while Europe and the Nasdaq remain up 10% for the year.
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Helping your clients assess the climate impact of their Portfolio

August 2, 2024
Nathan Fradley explains how the ethosesg technology can help you assess and design an ethical portfolio that aligns to an investor’s personal values.
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Carbon credits and investing – is it the outcome we expect?

August 2, 2024
ETFs that invest in carbon credits are now available. Why should we assume that their price will go up over time? And does buying a carbon credit ETF actually contribute positively to emissions reduction? Will it actually generate the outcome investors are expecting? This article explores the issues around investing in carbon credits.
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Better World makes a difference with investment in renewables

August 2, 2024
There are many direct assets and funds that contribute positively to climate action within the InvestSense Better World Portfolios. Meridian Energy is one of the stand-out direct assets in the portfolio with a climate energy focus.
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Bad news equals good news

August 2, 2024
In recent years professional investors have got increasingly used to the fact that good news is bad news for markets because higher interest rates are likely to be necessary, and of course vice-versa. However, last week the effect was stronger than ever and stocks rallied mid-week amidst reports of widespread lay-offs and expectations of a weak US jobs report.
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‘Buy the dip’ opportunism start surfacing

August 2, 2024
The US market finally market caught a bid last week. Early in the week the market was down few percent after an earnings miss by ad dependent social media platform Snap (of Snapchat fame) combined with weak guidance raised more doubts about the economy and economic resilience of tech companies.
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US momentarily dips into official bear market territory

August 2, 2024
The seventh negative week in a row for the US sent it briefly into official bear market territory before it recovered slightly late on Friday. The world’s largest stocks (Apple, Microsoft Amazon and Google) are all down 25%.
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How Mark Lewin saved 13 hours a week with Managed Accounts

August 2, 2024
Mark Lewin was a financial planner, but is now the Director of Back Office Heros. In his planning business he gained significant efficiencies by recommending and implementing managed accounts for his clients. He tells us how...
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