'The market has changed': Here's what to do about it

Index funds may not achieve the same returns going forward, according to these fund managers.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points
  • Interest rates and inflation are much higher than they were in the 2010s
  • The fund managers Allan Gray and L1 are pessimistic about upcoming index returns
  • But I believe stock pickers can still find plenty of opportunities that may outperform

The ASX share market has seen significant volatility since the end of 2021. We may be entering a new investment environment with higher inflation and higher interest rates than in the 2010s. But this could be an exciting time for stock picking, according to two fund managers.

The previous decade saw interest rates steadily decline, which provides a natural boost for asset values. As Warren Buffett has explained, interest rates are like gravity – the weaker interest rates are, the stronger that asset prices can bounce.

Most asset prices, including the share market, benefited from that low interest rate environment, providing a tailwind for passive investing in index funds.

However, some fund managers think the investment environment has now changed.

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.

Image source: Getty Images

Fund manager views on the outlook for investment markets

Contrarian fund manager Allan Gray's chief investment officer Simon Mawhinney recently said:

The chances of the S&P/ASX 300 Index (ASX: XKO) delivering close to 10% returns each year for the next 10 years are slim. The market environment has changed, and blindly investing in the share market is unlikely to yield results from here. Investors will need to be more selective in where they allocate their capital in future.

This doesn't mean that there aren't opportunities though, provided you can adopt a contrarian mindset.

Interestingly, fund manager L1 also backed this broad view. It recently said in an investor presentation:

We believe passive and index hugging strategies will no longer be able to deliver 10%+ returns. Going forward, active stock picking will be required to generate attractive returns.

For L1, the fund manager is targeting ASX shares with a low price/earnings (p/e) ratio, an attractive free cash flow yield, and are expected to generate above-market earnings per share (EPS) growth.

What to make of this?

It's perhaps unsurprising that stock pickers are going to say that the current investment environment is a stock pickers' market.

But I think it's fair to say that with an uncertain economic situation due to inflation and higher interest rates, only certain businesses may be able to keep performing with their profits and share prices.

In 2023 to date, the ASX 300 has risen by around 4.4% while some specific names have done very well. For example, the Xero Limited (ASX: XRO) share price is up 34% and the Woolworths Group Ltd (ASX: WOW) share price is 17% higher.

A lot of the Motley Fool's content is about trying to find investments that can do well in the coming years, so you're at the right place to pick stocks. I'm always on the lookout for ideas and I'll keep writing about them if I see them, or if fund managers have identified opportunities.

No matter what's happening on the ASX share market or with the broad economy, I believe we'll always be able to find some attractive or unloved investments that can do well.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

A happy youngster holds a giant bag of carrots at a supermarket fruit and vegie section, indicating savings made by buying in bulk.
Opinions

2 ASX shares I'd buy if the market fell another 10%

Pullbacks are great times to buy...

Read more »

Man holding a calculator with Australian dollar notes, symbolising dividends.
Dividend Investing

2 ASX dividend shares with yields above 7%

Large yields and potential capital growth. What’s not to love?

Read more »

A woman leans forward with her hands shielding her eyes as if she is looking intently for something.
Growth Shares

5 ASX shares I'd buy with $5,000 today

These shares are on my radar right now.

Read more »

A man rests his chin in his hands, pondering what is the answer?
Opinions

Is that the end of the ASX share market crash?

The stock market looks like it has started to recover.

Read more »

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Opinions

3 reasons to buy NAB shares today

Here's why I think the ASX bank stock is still a buy.

Read more »

Man drawing an upward line on a bar graph symbolising a rising share price.
Growth Shares

2 ASX shares that I rate as buys today for both growth and dividends!

Here’s why these stocks could make great buys today.

Read more »

A group of people in suits watch as a man puts his hand up to take the opportunity.
Opinions

2 top ASX shares I'd buy today amid falling prices

Sell-offs are a great time to buy shares.

Read more »

Australian dollar notes in the pocket of a man's jeans, symbolising dividends.
Opinions

Why buying ASX shares in March could supercharge your wealth

I think there are opportunities galore right now.

Read more »