Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Shaw and Partners portfolio manager James Gerrish gives his take on the current sell-off in stock markets and how much further it has to run.
The Motley Fool: How would you describe your managed accounts to a potential client?
James Gerrish: We describe our investment style as top-down meets bottom-up.
I know a lot of fund managers are very fundamentally driven, or very much focused on the company side, and we are, but not exclusively at the expense of the macro side. I think we place probably more importance on the macroeconomic factors that are playing out at the time on our portfolio construction — the sectors we want to be in — rather than letting our views around stocks dictate that.
MF: Since you do take macroeconomic conditions into account, I wonder what your thoughts are on the outlook for this year, given the current carnage?
JG: The macro assumptions that are driving the market at the moment [are] interest rates going up… so short bonds and now selling things that are interest-rate sensitive, and peak policy.
So peak policy, in terms of central banks and governments, occurred last year. Now we’re going into a scenario where that policy support is going to be less. Whatever it looks like, it is going to be less moving forward from here, and that’s probably the right response.
I think the market’s positioning right now for sharply high rates. We’ve now got 4 rate hikes priced in the US this year.
I think interest rates are at, or near a peak, in the short term. So I’m more of the view that inflation is probably more transitory than the market is now pricing in. The market, 4 or 5 months ago, was pricing inflation to be transitory. It seems like the market’s had a big change of tack, and it’s now pricing in sustainably higher inflation over time.
To me, from what I see in the bond market, from a macro standpoint, interest rates are really the key to try and get right. From what I see, I wouldn’t be surprised [for] the US 10-year [bonds] 2% is the cap this year for that.
So that implies probably, while they might be choppy, in my view, interest rates will be lower this time next year than they are today — which is absolutely not the consensus!
MF: So there could be some real bargains out there at the moment?
I think, in the short term.
When things don’t play out as the consensus is expecting it to, it creates a lot of volatility. And I think this year will be characterised by really high volatility. We’ll have it tougher. Everyone’s saying that, right? That’s not a new thing.
But I think there’ll be a huge divergence between sectors and stocks. So, [from] the start of this year, the NASDAQ-100 (NASDAQ: NDX) is down 11% from its highs. That’s a huge divergence out of tech, a huge move out of tech, which I think in the short term has probably run too hard. So we’ll get these, where the elastic band stretches too hard, too far. And I think that’s probably the case in interest rate sensitive sectors at the moment.