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  • 15/03/2019
    Corporate News
    Eoin Murray
    Are US China trade tensions really about steel, Jack Daniels and soy beans?
  • Eoin Murray
    In his latest note, Eoin Murray, Head of Investment at Hermes Investment Management, discusses the four words he dreads more than anything. There are plenty of words people in investment use to convince themselves – or others – that things are going to be OK. “This trade can’t fail”, “the market is rational”, “equities always go up”, are prime examples. But for me, the worst is: “This time it’s different.” Why? It invariably isn’t. The latest use of this maxim is by people unconcerned about the possibility of the yield curve inverting. The yield curve tracks short and long-term interest rates that fuel the traditional banking model. Short-term rates are usually lower, so it is cheaper for banks to take deposits, and the longer-term rates are higher, so they can issue loans and take a turn on the difference. Any disruption to this system sees the model break down. An inversion of the yield curve occurs when short-term interest rates are higher than long-term ones – it has been a reliable predictor of recessions. Of course there are many different ways of measuring the steepness of the yield curve, or the term spread. A recent paper by the Federal Reserve Bank of San Francisco suggests that it doesn’t actually matter whether we use 30-year minus 3-month, 10-year minus 2-year, or even attempt to include expectations:
  • Eoin Murray
    “There are as many worlds as there are kinds of days, and as an opal changes its colours and its fire to match the nature of a day, so do I.” In 1960, Nobel Prize-winning US author John Steinbeck set out on a road journey around his home country to see what he could see; to note any changes in the vast nation he hadn’t observed up close for decades. Aged 58 and in ill-health, Steinbeck was nonetheless willing to confront the reality of a rapidly-changing US from the driver’s seat of a jerry-built house truck and only a ‘middle-aged poodle’ called Charley for company. While his best-selling recount of the trip was tinged with nostalgia and tips for poodle maintenance, the writer didn’t let the past blot out a clear-eyed view of the present. “A journey is a person in itself; no two are alike,” Steinbeck wrote. Investors would do well to bear this advice in mind as they venture through the second half of 2018. In the latest Hermes Market Risk Insights report, Journeying through a changing risk environment, Eoin Murray, Head of Investment at Hermes Investment Management, explores the six key risks investors must navigate through during the latter part of the year.
  • Eoin Murray
    Eoin Murray, Head of Investment at Hermes Investment Management, discusses the recent ‘quantmare’ which took place in June: Ever had a recurring nightmare? Markets are having one right now. In August 2007, a small subsection of the global markets was hit by a violent sell off that preceded the financial collapse the following year. Those who lived through this episode still bear the scars. Market neutral strategies, which formed the liquid element of many multi-strategy hedge funds that were holding piles of illiquid credit, became the go-to element for fire sale in their portfolios – the easiest stuff to liquidate was equity factor exposure (today’s systematic beta). As they did so, all factors started moving against these market neutral funds – including the one I was running at the time. The biggest fund to be hit was Goldman Sachs' Global Alpha. It had around $12bn in assets and was several times leveraged and prompted Goldman’s chief financial officer David Viniar’s famous quote: “We were seeing things that were 25-standard deviation moves, several days in a row” (sic!). The fund closed in 2011, with a mere $1.6bn left.
  • Eoin Murray
    Despite phenomenal long-term share price performance, Big Tech has been besieged from all sides – governments and regulators have been forced to increase scrutiny, investors are questioning the future economic consequences, while consumers question the FANGs’ social licence to operate. In response to the major issues faced by Big Tech, Sickly Tech, a report by Eoin Murray, Head of Investment at Hermes Investment Management, raises deep questions about Big Tech’s future, the risks for investors, and outlines the necessary steps to drive reform. Even the market ruckus earlier this year failed to derail the trajectory of the Big Tech leaders. Instead, the market witnessed dramatic outperformance by Big Tech and the FANGs (Facebook, Amazon, Apple, Netflix and Google), which benefit from the ongoing growth in internet commerce. Indeed, if the FANGs (plus Nvidia and Microsoft) are stripped out, the S&P 500 has fallen over the year to date - such is the influence of their phenomenal momentum. Even from a global perspective, the FANGs are a vital positive story, with global markets overall having fallen slightly in 2018.
  • Eoin Murray
    "It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness; […] it was the spring of hope, it was the winter of despair." Dickens’ famous opening words in The Tale of Two Cities could set the scene for the current market and macroeconomic climate – a world of latent volatility; where contradictory extremes loom as equally likely realities; where the slightest change in political winds could send events either way. Is it to be a time of inflation or disinflation, liquidity or illiquidity, growth or slump? The dramatic return of share-price volatility in the first quarter of the year indicates some plot issues that may be resolved in 2018, but others remain hidden in the subtext. In the latest Hermes Market Risk Insights report, Spring of hope, or winter of despair? Investors face Dickensian conditions, Eoin Murray, Head of Investment at Hermes Investment Management, explores the six key risks facing investors in extreme financial conditions.
  • Eoin Murray
    Is the recent global market sell-off a healthy correction or a foreshadowing of darker times ahead for investors? In the latest Market Risk Insights, ‘Before the luck runs out’, Eoin Murray, Head of Investment at Hermes Investment Management, explores the six key risks investors face as they trudge out into largely unmapped territory featuring extreme financial conditions. “Our ongoing concerns about the recovery’s tenure have been thrown into sharper focus by the steepest market sell-off since the credit crunch. In these exceptional times, as active investors, we need to probe beyond simple measures to gauge the underlying temperature of the broader financial system. “We exist in a period where the market is acutely vulnerable to a change in circumstances. Indeed, our Complacency Indicator has been fixed at worrying lows – suggesting an explosive spike in market volatility could be expected. As we have noted before, complacency does not guarantee negative outcomes, but investors should continue to be cautious, embed flexibility into their investment strategies and be prepared for any eventuality. “The coming year is likely to hold plenty of surprises. Central bank tightening, or at least the end of post-crisis monetary accommodation, will undoubtedly prove challenging. Long-dormant inflation looms as a tail risk, while the global political landscape remains unstable. Below, I set out the key risk gauges investors must consider when navigating markets that still reside at lofty elevations.
  • Eoin Murray
    In the latest Market Risk Insights, How to evolve in the new investment climate, Eoin Murray, Head of Investment at Hermes Investment Management, checks the temperature gauge and identifies risks investors should consider as we progress through the fourth quarter. The year may be almost at an end, but 2017 still has the capacity to shock. The shift from one monetary regime to another is unlikely to progress without convulsions in the market. In our consistently-held view, the current calm – reflected in low volatility and generally benign conditions – may hide deeper market vulnerabilities that could catch complacent investors. To remain ahead of the risk curve, we measure forward-looking ex-ante risk from as many angles as possible. Our models, built on the ever increasing piles of patterned data produced by the apparent chaos of daily market moves, help us discern likely hazards ahead. The following is a synopsis of the key findings.
  • Eoin Murray
    The investment industry spends far too much time focussing on short-term, benchmark relative performances, entrenched an “era of quarterly capitalism” Haldane, A G, (2010), “Patience and Finance”, speech given at the Oxford China Business Forum, Beijing. Moreover, short-termism delivers substandard returns for asset owners and for the financial ecosystem. True long-term investing is still extremely rare when it comes to active management in the public markets. In his paper, ‘Playing the long game: Investing effectively beyond the market cycle’, Eoin Murray, Head of Investment at Hermes Investment Management, looks at how long-term investing could be done. Defining characteristics of long-term investing Alignment of interests A crucial component and foundation for successful implementation is to better align the interests of asset owners and managers. Asset owners can set the tone and be leaders in developing balanced, long-term capitalism that ultimately benefits everyone. It is imperative to employ consistent processes and practices that look beyond short-term market turbulence and concentrate on the long-term fundamentals and drivers of a company’s strategy.
  • Eoin Murray
    Markets are running hot in 2017 and markets are apparently cool with this. The complacent mood was recently jolted as the VIX spiked at its highest levels since the election of President Trump in November last year, but amidst geopolitical turmoil, calm has seemingly returned again to the markets. Here we check the temperature gauges for accuracy and identify potential risks that investors should consider as we progress through the third quarter. Every week the St Louis Fed measures the degree of financial stress in US markets through an index that combines 18 different financial variables – seven relate to interest rates, six to yield spreads, and five others – into a single metric. For some time now, this gauge, called the St Louis Fed Financial Stress Index, has found that investors are relaxed. Given the importance of the US to markets worldwide, the index also serves as a reasonable proxy for global conditions. Apart from the intensity of the immediate aftermath of the global financial crisis (GFC) and a brief rally in the opening months of 2016, the St Louis Fed index has been trending down or flat in sub-zero territory (see figure 1).