Views on improving the integrity of global capital markets
02 December 2013

Fear and Anxiety: Investing in Today’s Marketplace

The news from this year’s University of Virginia Investing Conference was a shade brighter than last year’s bleak picture of the global economy and the future of our financial markets. The recent “Finding Opportunity in an Unpredictable World” conference hit some positive notes while readily acknowledging that we have little hope of returning to the period of market exuberance predating 2007.

Changes in Market Psychology

CFA charteholder and Oaktree Chair Howard Marks noted that there has been a marked change in our perceptions of the financial markets during the last six years. First, we have lost some confidence and sense of certainty. Not only did we think we knew what made the global market economy tick and that we could project with some accuracy what it would be like in the next 5–10 years, we also thought we knew how to fix what could go wrong in the markets during that time. Second, we projected that there would be a continuing wave of liquidity flowing from China. Third, we believed that Wall Street “had conquered risk.” Through the “slicing and dicing” of risk through derivatives, tranches, etc., many thought risk was practically nonexistent.  And it was this too-much-trust, too-little-worry mindset that formed the basis for the excessive behavior leading up to the crisis, prompting Marks to note that “the riskiest thing is when you think there’s no risk.”

Marks suggested the following strategy for ferreting out future opportunities:

  • emphasize corporate investments
  • remember the reasons for caution (what he dubs the “improbable disaster”)
  • balance the pros and cons

He also noted that “the market is efficient, it’s just not right,” urging us to move forward but with caution.

Need to Rebalance Expectations

When considering how to uncover opportunities in these uncertain times, the need to balance expectations and approaches was a common theme expressed by panelists. One commentator urged using how much confidence is in the market as a barometer — buy when your price understates the existing confidence, and resist buying when confidence is too high. Others noted that during a time of uncertain monetary policy (which includes a risk of deflation), unemployment, and under-employment, it is important to focus on pockets that offer growth, including the tech and energy sectors. Several participants offered their views on where opportunities lie, although strategies for approaching them differed.

Jason Trennert, managing partner of Strategas Research Partners, directed us to the public equity market as the place to find returns. But he also noted certain contradictory forces that lead to future unpredictability. We currently require too much of our monetary policy to rebalance our markets while also adopting regulatory policies (like the myriad of regulations in the Dodd-Frank Act) that serve to stifle company movement and market innovation. He predicted that 2014 will be the year of leveraged buyouts.

Richard Chilton, CEO of Chilton Investment Company, noted that the markets are composed of fear and anxiety. He advised looking to the “boardroom DNA” — strong management and consistently good decision-making — when deciding on investments.

And endowment gurus Ellen Shulman, CFA (managing partner at Edgehill Endowment Partners), Don Lindsey, CFA (CIO at George Washington University), and Scott Malpass (vice president and CIO at the University of Notre Dame) noted different perspectives on where opportunities lie.  Shulman looks for market inefficiencies, noting that while currently distressed, the mining industry is “interesting;” there is a lot of dislocation in the retail industry, and the growth in the consumer power of emerging markets is an area to watch over the next 10–20 years. Lindsey, on the other hand, does not believe in an asset allocation approach and advised looking for pockets of opportunities in the global markets, particularly noting container ships, as well as the strength of the U.S. equity markets. Malpass, who likes a top-down approach, noted his concerns about the artificial bubbles being created throughout the markets due to protectionism and massive stimulus actions by the central banks.

Where does all this leave investors who are hunting for those investment opportunities? The advice is to move cautiously but to keep moving.  But this “protracted time of uncertainty” is vastly more optimistic than the tone of doom and gloom permeating last year’s conference. All bets are on for even brighter forecasts next year.


Photo credit: @iStockphoto.com/Nikada

About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

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