Where to find investment opportunities in the current environment? Talking with Mark Hawtin from Liontrust
30 SEPT, 2024
By Jose Luis Palmer from RankiaPro Europe
Mark Hawtin is Head of the Global Equities team. Mark joined Liontrust in May 2024 from GAM where he was an Investment Director running global long only and long/short funds investing in the disruptive growth & technology sectors. Before joining GAM in 2008 he was a partner and portfolio manager with Marshall Wace Asset Management for eight years, managing one of Europe’s largest technology, media and telecoms hedge funds. Mark Hawtin previously spent seven years at Enskilda Securities, initially as head of sales, before taking responsibility for the international equity business, overseeing pan-European research and trading activities and around a quarter of the investment banking staff.
Mark Hawtin, Head of the Liontrust Global Equities team, shares his views on the outlook for global markets, focusing on recent market volatility and the rise of passive investing, he also shares his views on the market outlook and where he sees investment opportunities in the coming months.
Over the summer we've seen an increase in volatility in global markets. What's driving this?
It's been a fascinating time for sure. At the end of July and going into August, we saw extreme volatility. And frankly from my own perspective, it felt a little bit like 1987. It came out of nowhere. There was a lot of uncertainty. There was one weekend where we woke up on a Monday morning to find the Japanese market falling by over 10%. And everybody was scratching their heads. But I think what's happening here is that we are at a pivot point in terms of a number of key data points for markets.
It's not entirely clear yet whether inflation is totally tamed and therefore, it is not clear what the path of interest rates will look like over the next one to two years. At the same time economies are slowing, but there are all sorts of different signals about how fast and how deep. On top of that, we've got this increasing concentration amongst major names in the stock market and the way in which investors invest in those markets. There is a big increase in passive investing which has passed 50% of all fund investing for the first time this year.
Starting with the passives, is that concentration risk and the rise of passives making markets more volatile do you think, or will they going forward?
I think they could do. I'm not saying they necessarily will and in some ways they can make the markets less volatile, because if the market is trending in one direction, then passives help support that trend. So, when markets are moving up, as they have done for most of the last few years, that passive flow actually supports the up-move and therefore, investors have done very well by just buying dips in markets because the passives have come in and continued to push the markets higher.
But I think what tends to get forgotten is that one of the features of passive investing is that unlike active investing, it is valuation agnostic, so it doesn't care what the value of a stock is. Therefore, this could also happen in reverse. For example, if we were to get a change in the fundamentals for markets which started to cause a turn or downturn or a more prolonged downturn, that could lead passive investors to start moving the market in the opposite direction. That could then increase volatility quite dramatically, and it is something that investors need to be aware of.
What could drive that change in fundamentals? What do you think is the most dangerous thing? Earnings, interest rates, economic growth?
I think the catalyst will come from the macro-side. It will be a misstep in terms of perhaps, interest rate policy. It may be that growth ends up being much slower than expected, or maybe we do indeed dip into recession. This is not clear, particularly in the United States - yet. Now, if that were to happen, that might be the catalytic point for a sharper downturn in markets. Then this sort of passive flow factor would come in and accelerate that move and raise volatility.
Are you worried about interest rates and economic growth, or is it just uncertain?
I think it's uncertain. From my perspective, the base case is that growth will be slow but will not dip into recession. That rates will start to come down, maybe not as aggressively as some may like, but it will create a kind of Goldilocks scenario, and that should be fine for markets. I think the real opportunity lies in where one is invested. By looking at different investment alternatives - maybe not focusing on the names that have done so well in the last six to twelve months - but by diversifying into other names, may be a good way of performing over the second half of this year.
Can you give us a flavour of where you are invested or what you like at the moment?
I think the passive theme is particularly focused on the M7 names because they are very dominant in passive investment vehicles. Over half of all passive vehicles are S&P trackers, which funnels money into those big names. While we still like those a lot, we are tending to downscale the size of those positions and look for positions outside the main indices. Names which are not being driven by passive investment flows, where there is a big gap in fundamental valuation, offering significant upside compared to the more passively held names, which may have less upside potential.
Could you give us one or two names as examples to illustrate that?
I think first of all look at it from a sector perspective. We are tending to look now at sectors outside the mainstream winners so far, looking outside technology or direct technology bias names, but we are still looking for companies that benefit from the use of technology. We would like to find consumer companies that benefit from using technology. Amongst the biggest names, we think that Meta is perhaps the best name to invest in because it's the clear first stage winner from the use of AI, which is the most popular technology and topic of the moment. And then I think below that, we are looking at some of the other industrial and healthcare names; names that are using technology effectively to drive their businesses, but which are not so dependent on either the passive flow or the technology flavour of the moment.
