GAM
Larry Hatheway
- The stock market has resumed its normal, sharp swings in both directions after a historically quiet year.
- Amid the volatility in February and March, a "single winner" emerged, according to Larry Hatheway, the head of investment solutions and chief group economist at GAM.
- "With the advent of two-way markets, where people who buy stocks can make money or lose money (which was largely absent in 2017), you're beginning to see investors focus on what can deliver hopefully reliable or predictable, perhaps less volatile performance," he told Business Insider.
As stocks surged last year and in early 2018, the most popular technology stocks became a bandwagon on which investors could ride.
This so-called momentum strategy of betting on stocks that are on an upward trend has been recently challenged amid a barrage of negative news about tech companies.
With stocks resuming the norm of swinging both up and down, "you're beginning to see investors focus on what can deliver hopefully reliable or predictable, perhaps less volatile performance," said Larry Hatheway, the head of investment solutions and chief economist at GAM, which manages $165.4 billion in assets.
Business Insider recently sat with Hatheway to discuss opportunities in this market, and what could work for investors going forward.
Hatheway previously worked at UBS in various roles for 23 years through April 2015. Most recently, he was the bank's chief economist.
This interview was edited for length and clarity.
Akin Oyedele: Thinking back to last year, the big tech names were some of the biggest contributors to the market. Now they are the ones in peril. There are individual things happening with each company, but it seems the momentum that took the market higher is swinging the other way.
Larry Hatheway: If we're just agnostic about components and just look at styles that worked despite the selloff in equity markets, momentum was still the right style to have in your equity portfolio in February.
It was not in March. Largely that reflects tech, and to a smaller extent, cyclicals and industrials that were both part of the upward trend in momentum that was still intact through February but reversed in March.
The single winner over both periods is quality. That's kind of an important observation because with the advent of two-way markets, where people who buy stocks can make money or lose money (which was largely absent in 2017), you're beginning to see investors focus on what can deliver hopefully reliable or predictable, perhaps less volatile performance.
That has really led people back to the idea that they want to see earnings. So, quality stocks, or those that fall under quality baskets, have been able to outperform over these last couple of months, which I think largely reflects that shift. Maybe if some of that idiosyncratic risk in tech had not manifested, one could imagine tech might have held up.
I do think that those very sort of oddly timed coincidental negative pieces of news on tech also reinforced this particular move. But I would tend to believe that in a market where people are anticipating that bond yields will be slightly higher, that growth has probably peaked in the sense that acceleration can't get a continued tailwind, there's going to be a tendency for people to play it a bit safer.
I think quality in all of its dimensions fits that.
I do think that we'll see rotation from momentum to quality, and what we're definitely not seeing is rotation from momentum to value. Value is still basically going nowhere. I do think it's now focused on people feeling comfortable with what they hold rather than holding out of hope or faith, which you could argue, for some parts of tech, was surely the case.
Trying to find a footing for the market puts an absolute premium on the first-quarter earnings season which kicks off shortly. The companies that do fit the quality basket arguably will present just as one would expect: on or around expectations.
I think the swing factors could well be tech though. Tech right now is beaten up. Expectations are obviously irrelevant in the sense that prices are lower and yet those same companies - think of Google as an example, or revenues in the Amazon's case rather than earnings - are likely to do very strong in the first quarter.
I tend to think that the underlying support for what we used to call momentum but will now call tech is probably going to be at least partly restored through the earnings season.
Oyedele: What advice do you have for new investors, who, for example, were still in school in 2008?
Hatheway: This is going to sound pretty simple, but the past is not a particularly good predictor. It's easy to believe that what has worked will continue to work. The new era of low volatility - just becuase it's been kind of a successful way for people to add income to their portfolios to be net short of volatility, to be net writers of options, doesn't mean that's always going to remain that way.
The other one certainly has conditioned our view around certain parts of capital markets, and it's not to take liquidity for granted. It's kind of easy to do that in benign markets. But then you find out when the market turns against you that in certain instruments - not so much equities but in credit, for example - that liquidity can dry up.
Oyedele: What are some of the biggest opportunities you're seeing in markets right now, as well as the biggest risks?
Hatheway: It's a little harder right now to find opportunities, to be perfectly honest with you. Part of what an investor needs to do is begin to lower their sights. We've been on an extraordinary run not just for 12 months, but arguably for close to 10 years now in stocks and bonds. That has to be drawing to a close. So being selective is number one.
Number two is building more robust portfolios. The classic 60/40 portfolio has served a lot of people very well for the period since 2009 onward and from 1980s. I think that period is also drawing to a close.
Equity markets over the next year, perhaps a bit longer, are going to be driven mostly by earnings surprises as opposed to multiple expansion and momentum. If it's momentum, it's earnings momentum that'll drive markets, not price momentum.
The two biggest risks have to be populism and inflation. Populism is maybe warranted. After all, we live in a world of massive inequalities of income distribution. It's, to some extent, if not justified, very understandable.
But populism is always anemic to markets and to free enterprise - the things that ultimately investors are looking to try to harvest in terms of risk premiums. I think we got a free pass on populism in the last couple of years. I'm not sure we're going to get another in the next couple of years.
The second one is inflation. We're now pretty close to full employment in all major advanced economies and the lags may be a bit longer, the responses may be a bit scarier, but inflation is probably going to pick up.
The question is whether the acceleration of inflation is going to be gradual enough that it allows central banks to be predictable in removing these extraordinary policies they've put in place, or whether it's going to be disruptive in the sense of accelerating too fast to have a gradual policy response.