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Is stockpicking enough in a populist era?

3rd October, 2019

Fund managers are fond of emphasising that they focus on stockpicking rather than troubling themselves with the broader macroeconomic landscape. However, macroeconomic developments appear to be having a greater and greater impact on market pricing.

• The collateral damage of the US/China trade war for individual         companies has been real and enduring
• The UK has also been a victim of this macroeconomic-driven             market with domestic stocks selling off
• Investors have clung to safe companies because policymakers         are not respecting normal rules.

For many years, any self-respecting fund manager would have dismissed the view that politics should come into their investment thesis. Yet the past few years in markets have seen the two sides collide.

Nowhere is this clearer that in the US/China trade war. At its heart, it is a spat over global economic power, yet the collateral damage for individual companies has been real and enduring. This is increasingly evident in the German manufacturing sector. This week saw purchasing managers indices (PMIs) fall to their lowest level since mid-2009.

Macroeconomics are never the whole story. The dismal performance of German carmakers such as Daimler Benz and BMW is not solely as a result of the US/China trade spat, but it has certainly dented its customer base at a time when they need all the buyers they can get.

The UK has also been a victim of this macroeconomic-driven market. International investors have largely avoided the UK market on the ‘too difficult’ argument. Domestically-focused stocks have been hit particularly hard on Brexit concerns.

Fund managers would argue that this presents opportunities. Macroeconomic ‘noise’ creates mispricing that they can exploit. This works if rationality is restored at some point, but when issues such as China/US trade tensions and Brexit bubble along for years and years, there is no catalyst for that rationality to return to markets.

There is also the problem of changing rules. Investors have clung to safe companies because policymakers are not respecting normal rules. The normal rules of capitalism – that governments don’t start trade wars, that there is an agreed trading framework in which to do business, that companies should be able to trade freely across borders – are being challenged by politics.

No-one would argue that fund managers should be switching their portfolio around with every tweet. That simply adds trading costs without delivering stronger performance. However, in an era of populism, surely the rules of stock analysis need to adjust to the times in which we find ourselves?

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