By Jeremy Lang
I scan the ‘most read’ news stories on Bloomberg as part of my morning routine. I like to see what other people are worried about. During May, four topics bellowed: Chinese debt, commodity prices, drug prices and the Fed.
Brexit lay largely dormant, until early June.Brexit was largely ignored until the first poll suggesting more people might vote ‘Leave’. This poll gave markets a jolt. Until then, most people living inside the financial markets’ bubble thought Brexit was a quaint sideshow in UK politics. Then the frequency of Brexit themed stories picked up.I live inside a bubble, surrounded by people who work in financial markets or who live within an hour’s commute to London. In this bubble, it is easy to hold an entirely distorted view of humankind; a view anchored to a belief in economic rationality. A belief people’s behaviour is governed by personal financial accounting, not emotion, bias or the very British tendency to bloody-mindedness. Most politicians evidently reside in this bubble too, oblivious to the idea the louder you shout at people not to do something – because it is stupid – the less they believe you. So despite mounting evidence from polls, it was accepted wisdom in financial markets that the worst that could happen in a Brexit vote was a close shave to ‘Remain’.Every morning, I have had to wade through a deluge of Brexit-related screaming headlines. I am writing about Brexit now because, apparently, no-one cares about anything else.Life, in my experience, is full of unavoidable, inherently unpredictable events – thank goodness. Yet many of us, especially if we are intelligent and well informed, seem to believe we can see the future. Personally, I find it easy to accept the idea the future is hard to predict when it is framed as a general argument. But when the future is framed around a specific event, it becomes extremely tempting to make a forecast. This is the problem with Brexit. When people make forecasts they tend to look for something similar for comparison. The trouble with Brexit is there is nothing similar, and yet people are looking into the future through the fog of Brexit.I have no idea what Brexit will mean specifically, but generally it looks like a class of event that tends to elicit some predictable patterns of response from people. First, it is the type which tends to polarise opinion. Polarised opinion tends to increase volatility, as there is a larger than normal gap between the views of buyers and sellers. Second, it is the type of event which causes bewilderment. Bewilderment tends to freeze people into inaction. This is generally not good for economies. Thirdly, it usually creates a sense of dread. Dread is difficult to dispel. Finally, these types of events tend to culminate in the acceptance of change. People generally do not like change – so after a collective freeze and a nervous gulp, change can sweep in surprisingly.Brexit is also the type of event with no cathartic end. It is the start of a tortuously slow period of tangled negotiation between two sides whose composition will unpredictably change. It would be a fool who thinks he can predict the outcome of something so inherently unpredictable.When we pick stocks we start with a jaundiced view of company management. We believe they are people who generally like taking risks. As an investor, you have to tolerate management risk-taking. But in an environment inherently riskier than normal, our tolerance for risk is a little lower than normal. Hence, we have become a little less tolerant of businesses wanting to take more risk – no matter how well argued. It is easier to be wrong now.Then we try to gauge the views of other investors, and their advisors. We try not to hold strong views ourselves, preferring to look for conditions where it is generally easier for the views of others to be wrong. Are conditions ripe for too much hope or too much fear; too much denial or too much scepticism? Confusion reigns at the moment. This makes for an odd mix of error.Within markets, both hope and fear can co-exist. Our simple view is that predictability is the most valuable commodity at the moment. So, businesses which are just easier to predict will probably do well but valuations will likely be viewed with fear. But pockets of opportunity still reside in areas where high anxiety has already exploded, like natural resources.Elsewhere, to be honest, who knows? But the beauty of being an active fund manager is you do not need to own things where you do not want to take a view. We can still find plenty of stocks to choose from in areas where we think there is either anxiety, or confusion, or both.Jeremy Lang is founder and partner at Ardevora Asset Management“Every morning, I have had to wade through a deluge of Brexit-related screaming headlines. I am writing about Brexit now because, apparently, no-one cares about anything else.”
Jeremy Lang
