Jean Christophe de Beaulieu
Global systematic investment specialist, Acadian Asset Management LLC, has warned investors about the dangers of latching onto popular investment slogans, and urged financial advisers to speak to clients about the risks inherent in chasing broad macro themes.
The group’s latest paper: Rising Tiger, Falling Dragon: Theme Du Jour in emerging markets equity investing, addresses the latest catchcry depicting the recent surge in Indian stocks and the disappointing performance of Chinese equities.
According to Ram Thirukkonda, Acadian Senior Investment Strategist, and co-author of the paper along with Portfolio Manager Chris Covington, catchy slogans can be cute and fun but they are also superficial and reflective of past price trends, leaving investors who follow them exposed to sudden reversals of sentiment.
The Rising Tiger, Falling Dragon theme currently trending is a satirical take on the Chinese movie, Crouching Tiger, Hidden Dragon.
“Macro thematic investing in emerging markets is risky and restrictive, and themes that start off captivating the market usually end up frustrating investors,” Thirukkonda said, citing examples including BRICS (Brazil, Russia, India, China and South Africa), BATTS (Baidu, Alibaba, Taiwan Semiconductor and Samsung) and the Fragile Five (Brazil, India, Indonesia, South Africa and Turkey).
“These past themes highlight the shortcomings of a simplistic view. For example, from 2017-2020, the emerging market tech stocks known as BATTS climbed 30% per annum, but when the BATTS-centric growth theme ended in late 2020, investors lost close to a quarter of their three-year gains in about forty days. Those who remained invested for another year, ended up forfeiting the bulk of their gains.”
Instead, investors should stay broadly invested and embrace active strategies that cast a wide net over the full investment universe and identify opportunities based on much richer information than just the macro picture, the Acadian paper states.
In Australia, Acadian offers a number of global equity strategies, which can be invested in emerging markets on an opportunistic basis.
According to Jean Christophe de Beaulieu, Head of Investments at Acadian Asset Management (Australia) Limited, investing based on fundamental, bottom-up stock analysis is more rewarding for investors than relying on top-down calls.
“One of the most dangerous things about following macro themes is that there is usually some truth to them. In the case of Rising Tiger, Falling Dragon, Indian stocks have rallied while Chinese equities have struggled for several years,” de Beaulieu said.
“At a superficial level, India and China appear to be polar extremes from an economic perspective, however, divergent macro trajectories don’t necessarily imply a promising investment opportunity. Furthermore, economic optimism about India and pessimism about China are broadly reflected in market valuations.”
“As investment professionals, we don’t place weight on slogans but we can’t assume others don’t. For advisers looking to actively engage with clients, particularly younger people, investment slogans and memes provide an easy talking point and an opportunity to demonstrate their expertise by warning of the potential dangers of following macro themes.”
