Written by: The Group of Boutique Asset Managers (GBAM)
Members of the Group of Boutique Asset Managers (GBAM)* are operating on four continents, and all are facing the uncertainties of 2023 by focusing on their usual ‘bottom up’ approach. But regardless of where they are on the globe, it’s clear that consistent themes are emerging at the macro level as well as them highlighting some distinctly local ones in their 2023 outlooks.
Inflation and recession are the central macro features highlighted by all, with inflation posing a challenge to central banks, and recession looming in Q1 resulting in a common theme of repositioning of assets. In repositioning, some see opportunities opening up….
In Zurich, Switzerland, Dr. Pius Fisch, Chairman of Fisch Asset Management – a global leader in convertible bonds says, “yield curves in the US and Europe are inverting more and more, sending increasing signals of recession. A "soft landing" of the economy is thus becoming less likely. Structural reasons, such as low debt ratios, solid labour markets and high consumption potential, however, point to only a mild recession.
“There is still a lot of negativity priced into equity and credit markets, but the short-term risk/reward ratio has deteriorated again after the recent price rallies. However, as soon as the expected shift in monetary policy will be realized in the coming months we will see a considerable upside potential for the remaining year,” said Dr Fisch.
This view is largely supported in Madrid, Spain, where Mapfre’s Chief Investment Officer Jose Luis Jimenez believes the consensus is that inflation will peak in 2023 and central banks will start a new loose monetary cycle.
“The not so bright view is that inflation reduction will not be a linear process. Being below 4%-5% is going to be tough. And due to central banks’ failure in predicting inflation, interest rates should be higher than markets expectation if they want to keep their credibility this time. This will happen in US and emerging markets, but it is not so clear in the euro zone”.
In Paris, France, Portfolio Manager Victor Higgons at Indépendance et Expansion – the leading French small/mid cap specialist, also feels that a serious recession is not guaranteed – particularly in the small cap space.
“It is not so certain that 2023 will see a significant economic recession in European Small Cap Equity universe. Financial markets have clearly priced it. Nevertheless, onboard inflation is high and top line growth in small and medium sized companies tend to be higher than the average. Therefore, a low single digit GDP recession could translate into a low single digit top line growth for small and medium sized listed companies.”
Also in Paris, France, Philippe Paquet, Partner and manager of ‘emerging managers’ firm NewAlpha Asset Management, says,
“On equities, derating has been significant while bottom-up news is still good. Even if EPS will be revised down slightly, the potential of some sectors or segments looks attractive. In particular, we think Tech, which has already absorbed the interest rate shock significantly, quality growth stocks (e.g. healthcare) and small/mid caps, which have suffered from the liquidity crunch, offer rebound potential. Active boutique managers have assets to exploit these sources of alpha.”
Further north in Stavanger, Norway, The Chairman of GBAM and Chief Executive of SKAGEN Funds, Tim Warrington, notes that the new investment environment means active bargain hunters like SKAGEN now have better prospects than at any time over the past 15 years. With market conditions more akin to the long periods when value investing reigned supreme, we could be returning to the old normal.
The advice from Tim in times of uncertainty, as now, is to stick to basic investment principles as they provide a degree of control over the investment process; know what you can know in terms of price and potential and identify the changes that a company might make to improve outcomes, or improve reputation, and help them to do so. That is, according to Tim, “What makes a difference.”
He goes on to say, “And being greedy when others are fearful confers advantage, especially when applied together with a longer-term investment horizon. This is not complex; it is common sense. After all, it is the same in any period of crisis or uncertainty, whether international or domestic. Those actors that focus on what they can control and care less about what they cannot, invariably prevail
Concerns about inflation and recession are held, not only by European boutiques – but also those much further afield – in Brazil, South Africa and Hong Kong. And their responses are generally the same, to stick with investing in those companies - assets that you know well in order to cope with emerging scenarios.
In Sao Paulo, Brazil, Paulo Del Priore, Founding Partner at the global multi-strategy investment manager Farview, said, that he is sceptical about macro forecasts and so seeks the more bottom up approach of building portfolios that are independent of macro scenarios. Factors driving their work therefore include the fact that there are now higher returns on cash; the constraints around quantitative easing thanks to inflation; and increasing active manager opportunities, as higher cash rates and less activist central banks, will result in higher market price dispersions.
“Next year will be very different from the last which brings significant challenges requiring a different approach to managing and building portfolios. One approach that manages risk is through portfolio diversification and properly priced risk premiums, particularly when seeking market liquidity.
Global and more local sector interests are the subject of Johannesburg South Africa based, long only equities specialist First Avenue Investment Management and its Chief Investment Officer & Principal, Hlelo (Lo) Nc. Giyose: “
“As we see it, a peak in global interest rates in Q1 ’23, and a slow return to global growth in the 02H23 should stimulate commodity prices and drive economic growth in the country. What will save the markets is that South African companies are generally excellent at capital allocation. The stock market now has the highest number of companies buying back shares than at any other time in history. As well, dividend pay-out ratios are also at their highest levels in history. Low valuations, coupled with capital returns to shareholders, make the South African stock market appealing
However, Lo says while companies are good at capital allocation, investment in South Africa is not without challenges that will impact as the country has not learnt how to construct internal growth engines in its economy…
“In fact, the economy is increasingly held hostage by global growth. Exports of commodities, specifically, account for a significant portion of foreign exchange currency earnings,“ he said.
On the other side of the world in Hong Kong, Chartwell asset management founder Ronald Chan and his intimate knowledge of his local markets - the Greater Bay Area (of China) gives him room for optimism, despite all the macro headwinds described above and some local ones that make China, as a whole, a difficult target for some Western investors. Ronald said the current economic size of the GBA is roughly USD1.9 trillion, and its further development is fully supported by the Chinese Government which is encouraging them to elevate their international position in finance, trade, shipping, aviation, innovation and technology, culture and tourism – all sectors in which he has an interest.
He said, “Hong Kong’s Hang Seng Index hit its lowest valuation in November at a 7x P/E ratio. This multiple is even lower than what was experienced during the financial crisis in 2008 and stands at a -2.4 standard deviation relative to its multiple average since 2005. Many factors may affect valuation in the coming months. However, in layman’s terms, if we use the index’s five-year P/E ratio average of 10.9x, the upside potential is likely to exceed 50%. While we do not anticipate such an upside in the near to medium term, the overall sentiment is leaning toward the positive”.
The Group of Boutique Asset Managers (GBAM) (www.gbammanagers.com) is a global network of like-minded, independent specialist asset managers who have come together to improve their presence in international marketplaces. It is a network of senior executives who run independent specialist asset management firms