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Any number of factors can combine to generate a broader sense of market or stock‑specific uncertainty for investors. These can be macroeconomic or geopolitical concerns, such as the current US‑China trade tensions, the moderating growth environment, or a shift in central bank policy. Or they can be more stock specific, with disruptive industry trends as well as operational, regulatory, and competitive factors all coming into play.
Ultimately, any uncertainty can lead to an erosion of confidence and weigh on stock market performance.
However, in the US large‑cap space — the most efficient part of the most efficient market in the world — these periods of uncertainty have historically provided strong alpha‑generating potential. While never exactly comfortable, we see uncertainty as an opportunity.
Never comfortable, but potentially profitable
Market uncertainty creates potential pricing dislocation opportunities, as investors will frequently overreact in response to bad news. Whether it is at a broad market level, or specific to certain stocks, uncertainty creates short‑term opportunities for long‑term investors to potentially take advantage of this dislocation.
Identifying companies that have these capabilities and potential demands research that goes beyond the day‑to‑day headlines. News stories create pockets of opportunity; however, it is difficult to make a lot of money from this kind of approach in the large‑cap arena. It might be possible to achieve a 1% or 2% gain following a major news story.
However, rarely is anything significant gleaned from this short‑term “noise” that is ultimately useful in gaining a deeper insight into the company’s long-term growth or profit profile. In our experience, the only way to consistently try to capitalize on uncertainty in the US large‑cap sector, is by having a deep understanding of companies’ fundamental businesses and the distinctiveness of proposition they offer.
Looking beyond the short‑term market “noise” - Facebook
Facebook is a great example of our approach. The stock fell from USD 210 in mid‑2018, to USD 125 over the next six months, largely due to concerns about its approach to data privacy. Poor decision‑making in the first instance and a distinct lack of transparency in communications once the issue arose weighed heavily on the stock.
However, looking beyond the immediate negative market reaction, we sought to revisit and retest our initial investment thesis. This involved further analysis into why so many companies use Facebook for their advertising, its principal revenue source.
During a series of visits to companies across the country, most confirmed that advertising with Facebook represented the first or second most significant return on their investment. Understanding this, it became clear that the data privacy breach would not, of itself, see companies withdraw what is effectively their most profitable avenue for growth.
As a long‑term investor in Facebook, we also had a good understanding of the potential impact of major issues on daily/ monthly average users. In this instance, despite the very public backlash, we observed only a relatively small negative impact on average user numbers.
The combination of these two factors meant that, when the stock price fell sharply, not only were we comfortable holding, but we added to our position during this period of weakness.
What we’re watching next
The US‑China trade dispute continues to weigh on investor sentiment, erode business confidence, and constrain capital spending. In our view, how this dispute evolves over the coming year will play a large part in determining the near‑term performance of the US equity market.
- Category: Our thinking
- Tags: Disruption & innovation
Key Risks
The following risks are materially relevant to the strategy highlighted in this material: Transactions in securities of foreign currencies may be subject to fluctuations of exchange rates which may affect the value of an investment. The portfolio is subject to the volatility inherent in equity investing, and its value may fluctuate more than a portfolio investing in income‐oriented securities.
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201911 – 1019421
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