Inside the mind of investors - Feb 2023

Markets are up even though uncertainty reigns and retreats to safety continue. Meanwhile, finding underlying economic signals in the noise feels almost impossible.

Effective investor relations is reliant on having deep insight into what investors are thinking.?So every month Edison brings you Inside the mind of investors.

A corpus callosotomy is a rare but established surgical procedure. It disconnects the left and right hemispheres of the human brain; a last resort to treat epilepsy.

So divided are the thoughts of many investors currently, some may well be wondering if they’ve been subject to one.

Half the mind of many investors continues to focus on the certainty that so much remains uncertain. Just as the world seems a brighter place and?consumer confidence returns, economies take a?turn for the worse?and interest rate rises are ready to?gain pace again.?

This constant flip-flop-flip of unpredictable economics makes allocating funds more of a lottery than many active managers are mandated to embrace.?

Which means, for those who can quieten the other side of their brain, a low-risk back-to-basics approach is the stock response.

Fund managers such as Chuck Royce?are firmly invested in high-quality businesses. Having been crowded out by various pandemic and recovery themes, Royce is screaming out that small-cap stocks with high and consistent returns on invested capital will out-muscle and outlast their competition. Eventually, investors will switch to paying up for the performance.

Others, of course, have turned to indices that seem, to their minds at least, relatively undervalued. Stuffed full of older, more conservative businesses with hedges against inflation, the Footsie has been a particular beneficiary. European banks also appear relatively cheap compared to the global peer group, and should make more money with interest rates returning to the ‘old normal’.?

All of which has meant growth and tech companies are, to the minds of many 2023 investors, what flared trousers were to a 1983 teenager: decidedly unattractive.

Yet, just as the mind accepts that the cash flow-generating, dividend-paying old guard are where it’s at, the other hemisphere launches a counter-attack.?

Citi’s global strategist pins the stock market gains on the?$1tn of cash?that the central banks of China, Japan and Europe have pumped into the economy, despite quantitative tightening elsewhere. His model suggesting each trillion pushes up equities 10% is echoing round the available space in many an investor’s mind. Are the gains simply systemic?

Professionals are also aware that retail investors are?rushing back to their trading apps. How long, the other hemisphere asks, will this last?

And so, adding in the general anxiety of uncertainty, many managers are still listening to the sweet nothings that this other side is wont to whisper. Whisperings that include taking a wilder or more creative bent.

Pundit Jim Cramer, for instance, thinks that the bears have got it all wrong and the market is?still on a bull run. Others gathered at a?Bloomberg event?to discuss investing in?the energy transition.

It may also account for why, as a?Financial Times?column posits, the investing tide is?shifting back towards active strategies. Focused ideas are needed when background performance is muted.

Mark Tinker’s thesis on emerging markets coming back into fashion is particularly stimulating. He argues that the most important thing out of Davos was the Saudis’ acceptance of?non-US dollar payments for oil.?

It’s not quite the end of the petrodollar, but creating the ability for the rest of the world to trade together, at the expense of the West, could be highly supportive of emerging market valuations.

And so you can see why many investors feel like they’ve had a corpus callosotomy.?

With both left and right hemispheres of the brain making sense, yet there being so little certainty in the world, which side do you listen to?