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‘An appropriate place of paranoia’: fundies prepare for stormy weather

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Investors are now fretting a recession to go along with a more volatile geopolitical outlook. But on that prospect, it’s the cooler-headed fundies that will prevail.

One thing that’s obvious from the last few weeks of market movements is that fear is running things again. Inflation and rate rises have given way to talk of recession, unheard of since the depths of the first Covid lockdowns and mostly avoided except in a technical sense in the developed markets through the same measures that are now fuelling the prospect of a real one.

But Hari Ramanan, CIO of global research strategies and portfolio manager for Neuberger Berman’s Global Equities Data-Science Integrated strategy (GEDI, and pronounced “Jedi”), thinks that guessing about recessions is unlikely to help you survive one.

“It’s tough to make predictions, especially about the future,” says Ramanan, quoting that old baseball playing philosopher Yogi Berra and his “Yogi-isms”. “The human brain wants to predict, but the odds are that we’ll get both things wrong. We’ll get the odds of recession wrong, and we’ll get the expected reaction of stocks wrong on top of that.”

Ramanan is another of the managers who have touched down in Australia in recent weeks to face questions from investors, existing and prospective, on how they will adapt to an increasingly volatile outlook where fossil fuels are back in vogue and the tech companies that have dominated the benchmark – and portfolios – are running out of room to grow.

Then there are those whispers of recession to contend with as well. And anybody who talks to fundies on a regular basis will be familiar with the language they use to tell their clients that everything is going to be alright.

“The natural tendency for managers such as us is to make the case around two things. We’ll say we don’t need to own fossil fuels to generate alpha; we can generate alpha in high PE stocks, we can generate alpha even in an environment that looks from growth to value,” Ramanan says. “The second defence is to say that through inflation or recession, very high-quality companies will ultimately thrive because these are the types of businesses that can pass through inflation.”

But while that’s the natural tendency – the first port of call for any fundie arguing their investment bona fides – Ramanan says that it’s necessary to recognise that we’re now exiting an era where the best way of generating alpha was just showing up.

“People got quite comfortable owning a bunch of technology companies that all had varying degrees of recurring revenues, that had revenues that came from the general trends towards digitisation or innovation,” Ramanan says. “And so I think anytime you’re coming from a period where it has been very easy to do something, one must sweat a bit more. One must sweat the idea of whether one has been lucky. Have we been beneficiaries of forces that were outside our control?”

“I try to start from an appropriate place of paranoia. It would be easy for me to come back and tell you that these will ultimately prevail, but it’s an easy answer… there are elements that tell us we need to be circumspect, and we need to operate with some resilience.”

The GEDI fund was awarded a global equities mandate by State Super in 2019, and uses “alternative data” to identify companies. Fundamental investors typically rely heavily on financial data and earnings calls to get an idea of what a company is worth; Ramanan and the GEDI team use diverse data from job postings, salary and work statements, customer reviews, web searches, and patent databases, to augment “the other 80 per cent” of what they do, which is fundamental financial analysis.

“Not all of this data is new, but it has required computing costs to come down for us to be able to clean and synthesise and make sense of that data. We’re talking about terabytes of data getting processed,” Ramanan says.

There are two approaches to the use of that data; go an inch deep and a mile wide, and cover hundreds of companies in the approach favoured by quantitative managers; or take a relatively high conviction, fundamental approach and go “an inch wide and a mile deep” to amplify a hypothesis the team already has.

“We’re able to leverage that alternative data as an independent source – independent of what management teams have to say about the strength and resonance of the products and services they use. Such data naturally lends itself to doing things in the consumer world.”

That approach has seen the GEDI invest in luxury businesses like LVMH, which Ramanan believes can weather an economic slowdown. It presents an “unconventional case”, given its place in the consumer discretionary sector, but LVMH invested heavily in its own business and made several acquisitions – including Tiffany & Co. – through  the Covid slowdown, and emerged stronger from the disruption than it was when that disruption began.

“While the immediate next two months might sound scary – because we could go into a recession – it’s important to keep in mind that the market is smarter than us and has already got there… You’ve got to keep your eyes on the prize: a strong company that got stronger.”

And on the question that many clients are now posing – that of recession – Ramanan believes it’s simpler than it looks, having invested through the Tech Wreck, the GFC, and the Covid Crisis. By the time you know it’s happening, it’s mostly already over. Investors and the media that dutifully cover them have it all wrong when they ask about the likelihood of a recession, because stocks move in advance of periods of economic strife.

“Stocks are forward looking. In 2009, numbers were looking very, very weak for companies but stocks were going up. In the trade war in 2018, the economy slowed. In 2019, they were still talking about a slowing economy when stocks were going up. In 2020 when everybody was wondering what letter of the alphabet we were going to have to live through – whether it was going to be an L or W-shaped recession – stocks bounced hard. The economy bounced shortly after that.”

“We’ll see what happens this time. Not everything repeats, but it does rhyme.”




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