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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Big investors have just wrapped up mid-year lookahead season — that point in the calendar where they articulate what has gone right and wrong over the year so far and attempt to make plausible predictions about the coming six months, all in the hope that they will not look silly when 2024 draws to a close.
To me, the most prominent word to come out of this flurry of analysis is “but”. Market predictions are always laced with a thick layer of caveats. No one knows the future, after all. Yet even allowing for that, a huge number of analysts and investors messed up their views six months ago.
It is July, and none of the supposedly nailed-on rate cuts from the Federal Reserve has yet arrived and, what’s more, stocks and other risky assets are still holding on just fine despite warnings of gloom after the run-up in rates. The US recession is just around the corner, and seemingly always will be. There’s a lot of humble pie on the menu.
As a result, caution is shining through, and investors seem unwilling to make bold bets. Simona Paravani-Mellinghoff, co-head of multi-asset strategies and solutions at BlackRock, described this as a “yes but” landscape.
“Yes, we have inflation moving down from the high single digits, but it’s still running above the [Fed’s] 2 per cent target,” she said at a recent briefing. “Similarly, we expect artificial intelligence to be productivity enhancing over the medium term but the timing and extent of that are pretty uncertain.” By her analysis, AI will be disinflationary, but not yet. Indeed, it will probably first fire up inflation through the massive amounts of capital expenditure companies will have to splurge on making it work. Even then, it’s pure guesswork exactly what difference it will make to corporate bottom lines.
With regret and apologies in advance to the FT’s sub-editors, I must inform you that BlackRock has invented a whole new word for this collision of big market forces: potential outcomes are, it says, “polyfurcated”. The finance industry’s commitment to inventing horrible new words remains undefeated.
This latest creation was the result of extensive debate at the world’s biggest asset manager over how best to articulate the curious mix of messes in global markets. What it means, though, is that investors need to exercise caution in sticking too closely to any particular worldview.
“The reality is when it comes to building a portfolio, doing the boring thing is the best thing to do,” Paravani-Mellinghoff said. Diversify, know where your risks are concentrated, be ready to admit you’re wrong and jump out of even deeply cherished positions quickly.
Proof of the value of that approach has come in the past 10 days or so, since US economic data showed a renewed decline in inflation. Investors have taken that as a signal to load up on stocks of smaller companies, which tend to be bigger beneficiaries of lower borrowing costs, while simultaneously backing away from the huge tech stocks that have dominated returns.
The Russell 2000 index of smaller US stocks leapt more than 10 per cent in the days after that inflation data landed, while the tech-heavy Nasdaq dropped more than 3 per cent. Deutsche Bank pointed out that this is the biggest rotation between the two indices since the birth of the Russell 2000 in 1979.
The speed of this switch is a reminder of just how fast supposedly stable market dynamics can turn. Little wonder, then, that the big issues of the day attract such divergent opinions.
In its latest fund manager survey, for example, Bank of America found that 43 per cent of investors believe AI stocks are in a bubble. At the same time, though, an almost exactly equal proportion believe they are not. Goldman Sachs also observes that “investor scepticism abounds” over how this technology will be adopted and monetised.
A survey by Absolute Strategy Research underlined the differences in investors’ narratives. Those of an upbeat disposition on stocks are in the “in AI we trust” camp while the more slow-and-steady camp favours value stocks such as those in commodities. Still, a fifth of respondents to its survey expect a recession, and only 13 per cent are concerned about inflation and overheating. Weirdly, even those who believe inflation will pick back up again still expect bond yields to fall, an inversion of the usual relationship.
Mix all this together and in the round, investors are generally unwilling to fight the broad stock market, which keeps on grinding higher. But as ASR says “optimism remains muted”.
So, not for the first time this year, we find ourselves in an awkward situation where stock markets are in party mode — the US S&P 500 benchmark has climbed for 28 of the last 37 weeks according to the number crunchers at Deutsche Bank, making this the longest run of its kind since 1989 — but investors are much more cautious. We are late in the economic and markets cycle, and everyone knows risky assets are “brittle”, as Morgan Stanley has put it. That’s not enough reason in itself for investors to run to the hills. But the easy part of the year is clearly behind us.
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