The CFA Institute Equity Research and Valuation Conference is an annual event covering global investing strategies and valuation approaches and analysis. The Equity Research and Valuation 2019 Conference, hosted by CFA Institute and CFA Society New York, will be held 14–15 November in New York City.
BlackRock’s chief equity strategist Kate Moore finds a lot of things interesting about the current investing environment. For one, she and her firm believe that the range of potential economic outcomes has meaningfully widened.
“We think that both the right and the left tails have gotten a little fatter,” Moore said at the CFA Institute Equity Research and Valuation Conference 2018. She sees it as an opportunity for equity investors, even while others are more cautious.
“I feel like we’re at a place in the market right now where everyone is feeling anxious,” Moore said, “where the list of anxieties — whether it’s earnings, or macro, valuations, sentiment, geopolitics, length of the cycle, liquidity concerns — are causing people to take risk down.”
Moore is not convinced that this is a good time to remove equity risk from investment portfolios. “We have to ask ourselves,” she said, “‘Solid growth, rising rates, inflation percolating, but really only on the wage side — is this the right environment to buy a bond proxy?’” And according to Moore, some of the sectors that are most correlated with bond prices are suffering from structural impairments.
“It actually feels like people have taken risk down across the board,” she said. “That they are sort of paralyzed by this uneasy equilibrium between strong growth and solid earnings, and the fears around policy and geopolitics, and the duration of this cycle, and not trusting themselves to evaluate real value opportunities.”
She sees a major problem facing portfolio managers who may have stalled while waiting for the right opportunity. “Can we be in that ‘wait and see’ mode for a long time and also generate alpha and prove our worth?” she asked. Moore explained that portfolio managers who want to make the most of market opportunities have an important question to answer: “How do we think about building a portfolio that is adequately defensive at this stage in the cycle, but also allows us to take advantage of opportunities and risk?”
Moore said that three investment themes will play out over the next six months: Increasing macroeconomic uncertainty will mean a wider range of growth outcomes, tighter financial conditions will mean different market dynamics, and the resilience of investment portfolios will take on greater importance.
But the biggest driver of returns in the coming years may be the changing nature of equity investing. “Some of the ways that we have to think about value need to evolve,” she said.
Earlier in her career, when she was the most junior member of an investment team, she recalled listening to earnings calls and trying to take accurate notes. But improved technology and advanced techniques, natural language processing (NLP) among them, have rendered such tasks more and more obsolete and allowed investors to analyze more earnings call transcripts with increased precision.
“What do we need to do that’s bigger and better,” Moore asked, “since we all have access to this information and it’s immediate?”
As these technologies continue to transform the investment industry, analysts must change how they engage with it. Moore said, “You have to understand how the rest of the market is using this data — how they’re using it to impact their decisions, and how that’s evolving the overall investment process — instead of just blindly incorporating these new sources of data into your models.”
Meanwhile, the new methods must be integrated with existing expertise. “We also feel that those people that have been covering companies and stocks, and who understand the market and the behavior of the rest of the investors in the market, are also critically important,” she explained.
This evolution of the investment process would be challenging in a calm market environment, but the months ahead suggest new levels of difficulty for money managers. “We have to constantly balance out what might be interesting opportunities over the longer term with the pressures of fund flows and redemptions, as well as changes in overall appetite for different investment styles,” she said.
Overall, Moore takes a positive view of all these developments. “The work that we all have to do on the equities side is becoming more complicated,” she said, “but arguably much more fun.”
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image courtesy of Paul McCaffrey