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Insight - Making Sense of the Narrative


Periodically, we take the opportunity to refresh our portfolio of Themes, incorporating new ideas to replace ones that that we think are no longing offering attractive risk return opportunities. We monitor the new ideas for a period, before incorporating them when we think the risk return is attractive, guided by our confidence scoring systems. As the risk return profile more generally has improved and as we reallocate cash back into our themes, we have added two new themes from our 'watch list' - Japanese Wholesale and Trading Companies and Emerging Markets ex China. The note provides more details and background.

This year has been all about the Magnificent 7 mega cap Tech Stocks, who have contributed 95% of all the S&P Return. But then so was last year, when they subtracted an almost identical amount in terms of Contribution to Return. So what for 2024? Those who bought in January were buying value in heavily discounted growth, an argument that doesn't hold this year. Many who bought in q3 were chasing momentum and/or short covering underweight positions. Neither of which are sustainable strategies. The story we are currently telling ourselves is AI, but that is going to have to translate into heavily superior earnings from here.

Behavioural Finance is about trying to take the emotion out of markets and investing, but markets are narrative machines and it is easy to get caught up in a plausible narrative. One way of countering this effect is to look for the emotionally effective but ultimately misleading use of Logical Fallacies. Here we provide a Bingo Card of the 25 most popular examples as well as an illustration of how a combination of Logical Fallacies can build a bandwagon narrative.

Recency bias might lead us to think that the weakness in October was all about Gaza, but there were clear signs of fragility already appearing in bond markets as the mark to market impacts of the bond bear market continue to lead to forced selling, particularly in Japan. The key to stability is for cash to move out along the bond curve in fixed income even though we would not expect cash rates to fall much. however, the narrative will likely turn to slowdown to support the bond narrative, and we suspect the cash pile destined for equities will go to high quality dividend yield stocks offering the prospect of quality compound real returns. We thus expect a flip in Asset Allocation - from Long Duration Equities and short duration bonds, to Long Duration Bonds and Short duration equities