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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is senior adviser at Engine AI and former chief global equity strategist at Citigroup
For some reason I chose to study economics at university. My course split into the macro and micro. In macroeconomics we looked at the broader forces driving an economy such as inflation and interest rates. In micro, we studied company behaviour. We spent the time between lectures arguing about which we disliked most. I could never decide.
Like many of my fellow economics students, I applied for a job in the financial sector. After many rejections, I scraped in as a graduate trainee at a long-forgotten London stockbroker. At first, I spent time helping bottom-up stock analysts research individual companies. Then I moved on to the economics team where I maintained top-down models of the UK economy.
Eventually, the time came for me to choose a direction for my career, top-down or bottom-up? Again, I couldn’t decide, so chose to be an equity strategist. This generalist profession sits somewhere in between economics and company research. It was my job to forecast the future direction of the FTSE 100 index but I also needed to have a view on which stocks or sectors were best placed to outperform as the macro backdrop shifted. The range of topics covered in investor meetings was bewildering.
I soon realised that I knew less about the macro than all the top-down investors I met. I knew less about companies than all the stockpickers. I was almost drowned by imposter syndrome, but eventually found a survival strategy: talk bottom-up themes to top-down investors and top-down themes to bottom-up investors. “Come on pal, tell me something I don’t know,” was Gordon Gekko’s demand of rookie broker Bud Fox in the film Wall Street. This rookie strategist got there in the end.
Of course, there’s little point in telling people something they don’t know if it’s not relevant. That’s another trick that I learnt over the years. For example, once I had shown there was a close relationship between tech share prices and bond yields, stockpickers demanded regular updates on fixed income markets. A more macro-focused investor still remembers the meeting I arranged with a colleague who was a food retail sector analyst. Once persuaded that Tesco and Sainsbury would remain engaged in a bitter price war, he realised that bond market inflation fears were overdone, loaded up on gilts and made a killing.
In an investment world which was becoming more specialist I found another outlet for my generalist skillset — unintended consequences. Identifying these is, by definition, very difficult but does demand a broad perspective. The scenarios are almost infinite. But that doesn’t mean we shouldn’t try. It produced a call that made my career.
Back in the early 2000s bear market, well-intentioned new accounting rules forced UK pension funds to reduce their exposure to risky equities and load up on liability-matching gilts. I focused on an unintended consequence of this, a secular derating of equities against bonds. I saw that conventional investors couldn’t reverse the widening valuation gap and predicted widescale de-equitisation, or shrinking, of the UK stock market. It’s still playing out now, 20 years later.
What might be the unintended consequences of current policies and themes? The rise of investing on environmental, social and corporate governance factors is an obvious place to look. For example, if public market investors call for listed companies to be ESG-compliant, will less ESG-compliant companies disappear into private hands? Will the pricing power of incumbents in less ESG-compliant industries rise sharply as capex is constrained by reduced access to financing?
There will be unintended consequences of higher interest rates. We’ve already seen a squeeze on US regional banks as deposits switch towards the safety of larger banks and money market funds. Higher rates have also reduced pension fund liabilities, freeing up cash flow to be invested in capital expenditure or returned to shareholders.
Higher rates will have unintended consequences for the asset management industry. Absolute return investment strategies could become less relevant when cash offers 5 per cent with no risk of capital loss. I haven’t even got to geopolitics, demographics or banking regulation. The sources of unintended consequences are endless.
I am now an adviser to an artificial intelligence company. I can see how good the robots are getting. It’s hard to tell them something they don’t know. However, brainstorming about unintended consequences is one thing they can’t do. We generalists still have an edge, for now anyway.
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