Active investing in a shifting world

Global investors have had no shortage of challenges to contend with in recent years. Inflation shocks, geopolitical tensions, supply chain disruptions and rising interest rates have repeatedly tested confidence. Despite these headwinds, economies and markets have proved remarkably resilient, but this masks a more complex reality.

“In a world where capital is expensive, credibility and execution become much more valuable.”
– Marie Antelme, Economist

Global growth is increasingly being driven by a narrower set of forces. In the United States, investment in AI-related technologies has become a powerful engine of economic activity. In China, growth has become increasingly reliant on external trade and industrial activity, while domestic demand remains subdued. At the same time, governments around the world are grappling with rising debt burdens, ageing populations and questions about how artificial intelligence will reshape economies and labour markets.

For investors, the obvious question is whether uncertainty should lead to greater caution. If markets have already delivered strong returns and risks remain elevated, does it still make sense to maintain meaningful exposure to equities?

We believe the answer is yes.

UNCERTAINTY DOESN'T ELIMINATE OPPORTUNITY

Periods of uncertainty are often uncomfortable for investors, but they are rarely devoid of opportunity.

One of the defining characteristics of today's market environment is that headlines and market performance do not always tell the same story. While major equity indices have delivered impressive returns, a relatively small group of large companies has driven a disproportionate share of that performance.

At the same time, fewer companies than usual are outperforming the broader market. This means that investors looking only at headline index levels may miss what is happening beneath the surface. For active investors willing to look beyond the index, this is where the opportunity often lies.

When capital flows concentrate around a narrow set of popular stocks, quality businesses elsewhere in the market can become overlooked. Share prices can diverge from underlying fundamentals, creating attractive opportunities for investors willing to do the work required to uncover them.

That is why our constructive view on equities does not depend on a single macroeconomic forecast. It is grounded in the opportunities we continue to find in individual businesses, even against a more uncertain backdrop.

LOOKING BEYOND THE MARKET'S BIGGEST WINNERS

Artificial intelligence is one of the most significant technological developments of our time, and it is already influencing how businesses operate, compete and grow. It is also shaping investment opportunities.

Much of the attention around AI has focused on the companies directly benefiting from the substantial infrastructure spend taking place globally. While these businesses have undoubtedly been major beneficiaries, the investment opportunity is broader than the obvious winners.

At Coronation, we assess how our holdings are exposed to AI by categorising companies as ‘AI winners’, ‘AI resilient’ or ‘AI at risk’. This framework helps us understand which businesses may benefit from the technology, which may be vulnerable to disruption, and where markets may be overestimating that risk.

This selectivity is particularly important in an environment where market leadership has become increasingly narrow. Investors who focus only on what has already performed well risk missing where future value may emerge. Our role is to identify those opportunities and ensure portfolios are positioned to benefit from them.

“Risk is not volatility. Risk is not having the patience and fortitude to remain invested.”
– Pallavi Ambekar, Portfolio Manager

THE BIGGEST RISK MAY NOT BE VOLATILITY

When investors think about risk, they often think about market volatility.

Sharp market declines are uncomfortable. They attract headlines, test conviction and can make even experienced investors question their decisions. Yet volatility is not necessarily synonymous with risk.

A more meaningful definition of risk is the permanent loss of capital, or the failure to meet long-term investment objectives.

History shows that strong long-term equity returns are rarely delivered in a smooth, predictable fashion. Periods of market strength are often interrupted by corrections, drawdowns and bouts of uncertainty. Those who benefit from long-term wealth creation are typically those who remain invested through volatile periods, rather than those who attempt to avoid them altogether.

Successfully timing markets requires not only knowing when to reduce exposure, but also when to increase it again. While investors may occasionally succeed in avoiding part of a market decline, identifying the right moment to re-enter is often far more challenging. Unfortunately, some of the strongest market gains frequently occur during the early stages of a recovery, when confidence remains fragile and uncertainty is still high.

The cost of missing even a small number of those important days can have a profound impact on long-term returns.

For this reason, we believe that patience and discipline remain among an investor's most valuable assets. Volatility is often simply the price of admission for participating in the long-term wealth creation that equities have historically provided.

STAYING FOCUSED ON WHAT MATTERS

Debt levels are rising. Demographics are shifting. Artificial intelligence is reshaping industries. Interest rates are likely to remain higher than investors became accustomed to over the previous decade. These forces will continue to influence economic outcomes and investment markets for years to come.

While the backdrop may change, the principles of successful investing remain remarkably consistent.

A disciplined investment process, a focus on valuation, diversification across opportunities, and the patience to remain invested through periods of uncertainty continue to be the foundations of long-term wealth creation.

In an environment where the range of possible outcomes has widened, investors may be tempted to focus on what could go wrong. We believe equal attention should be paid to the opportunities that uncertainty creates.

Uncertainty may be inevitable, but abandoning a long-term investment approach is often the greater risk.

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