How have external market factors influenced investor decisions so far in 2022?

Jhe first four months of 2022 saw a perfect storm of macroeconomic and geopolitical events, which led to a very high level of volatility in financial markets. Following Russia’s invasion of Ukraine on February 24, many Western countries introduced sanctions aimed at crippling the Russian economy. This has created an economic shock wave across the world, mainly caused by Western companies seeking to reduce their exposure to the Russian market while reducing their dependence on Russian oil and gas.

On top of that, inflation continued to pick up, mainly due to economies emerging from the pandemic, leading to a spike in demand and consequent input costs. Recent news regarding the Russian-Ukrainian conflict has pushed expectations for future prices even higher.

Finally, although many countries are entering what they would describe as a “post-pandemic” period, the surge in Covid cases in China has led its government to impose new restrictions pushing its economy to the brink of recession, causing d important supply chain issues around the world. economy.

This unique set of circumstances had a negative impact on global equity markets, although some companies weathered the storm better than others. Nasdaq Advisory Services looked at investor ownership flows into its international client base since the start of 2022 to see what trends, if any, could be seen over the period. This can potentially help businesses better understand their positioning relative to the rest of the market.

Typical rotation away from cyclicals, but distorted by inflated commodity prices

The performance of the sector index over the first four months of 2022 (Chart 1) paints a gloomy picture for European equities, except for the positive performance seen in energy and materials, which is not perhaps unsurprising given the rapid rise in commodity prices and the resulting high expectations for earnings in these sectors . These two industries aside, there is a fairly typical story of stronger performance in non-cyclical defensive stocks such as telecommunications, utilities and healthcare, while cyclicals fared less well, led by technology, consumer discretionary and industrials. Supply chain issues, along with slowing global growth, are the primary driver of these groups’ underperformance.

Source: Nasdaq IR Insight (data as of 30.04)

Flows reveal a similar pattern between cyclical and non-cyclical, but with a speculative twist

Sectoral flows represented by the amount of investors’ money entering and leaving avant-garde sector ETFs paint a very similar picture. Strong outflows from cyclicals, led by technology and consumer discretionary, are being offset by positive flows into traditionally defensive names. Surprisingly, financials (a sector known to be particularly sensitive to economic uncertainty) leads the pack in terms of inflows, indicating that some investors see opportunity beyond short-term challenges. Financials generally benefit from rising interest rates, well-capitalized balance sheets and the fact that the sector is generally considered to be oversold more recently.

Vanguard ETF Sector Flows 2022 YTD ($M)

Source: Refinitiv Lipper for North America (data as of 30.04)

How has the institutional investor community reacted?

Long-only institutional investors have a reputation for taking a long-term view, looking beyond short-term events, while trying to stay focused on the fundamentals of the companies in which they invest. Indeed, companies are often surprised that after periods of high market volatility, their main investors have held on and sometimes even taken advantage of a bear market to increase their exposures. Much of the movement in stock prices and market volatility is often driven by high turnover players trading in and out of the markets over a much shorter period of time.

This is not to say that some actively managed investment firms may have lost their patience (or their temper) with certain investments while being attracted to opportunities that could provide a safer haven and better returns in a changing market. decline. Indeed, Nasdaq Advisory Services has observed that several investment companies follow the cyclical/non-cyclical trend identified in this report. Using a sample of its shareholder analysis clients and dividing them between cyclical and non-cyclical companies (while removing energy and materials to avoid any potential distorting effects), the next key investor activity institutional was observed:

Top 10 non-cyclical buyers - 2022 YTD

The top buyers among non-cyclical Nasdaq year-to-date clients have been characterized by a concentration of US-based companies. Based in San Francisco Dodge and Cox International Value Fundsmanaged by Diana Strandberg, is by no means heavily weighted towards non-cyclical stocks, but it has recently increased its already overweight exposure to health care.

Meanwhile, Artisan partners, which is headquartered in Milwaukee but has portfolio managers on the East Coast and West Coast, also likes health care and is also overweight consumer discretionary. This investor operates through a range of different strategies (Growth and Value) and is also known to participate in activist campaigns.

In Baltimore, T. Rowe Price Associates has an overweight exposure to consumer staples and utilities. Raymond Mills Performance Driven Overseas Equity Funds is one of the company’s main international strategies. The firm also manages a range of funds from its London office, including Richard Clattenburg’s funds International Equity Fund.

Finally, core value Harris Associates in Chicago has taken names in the cyclical space in 2022, thanks in large part to its flagship Oakmark International Funddirected by David Herro.

Top 10 sellers of cyclical stocks - 2022 YTD

Investors who have reduced and de-risked their portfolios’ exposure to cyclical clients reveal a mix of geographies. Sovereign Wealth Fund based in Oslo Norway Bank often features in “top mover” lists due to the sheer size of its equity assets and the centralized nature of its investment process. The company has recently reduced its exposure to the financials, consumer discretionary and industrials sectors.

Dutch pension fund APG Asset Management adopted a more cautious stance by reducing its positions in the financials and consumer discretionary sectors. Unsurprisingly, pension asset managers are more likely to take a risk-averse approach.

In Asia, the Chinese sovereign fund SAFE investment companywho manages the foreign currency assets for the People’s Bank of China, has been a seller more broadly in recent months, likely linked to the pandemic-induced economic slowdown in China. Economic downturns have the dual effect on sovereign wealth funds of reducing the amount of surpluses to invest while increasing the number of funds drawn down to support growing domestic deficits.

Elsewhere, Core Growth Ballie Gifford in Edinburgh was the top seller among Nasdaq Consumer Discretionary clients, a sector to which it has always maintained an overweight exposure.

Finally, America’s top Cyclicals seller was based in Los Angeles Pavement Capitalwhich invests primarily in international equities through Harold Hartford’s International Value Funds. Causeway was one of the top sellers of Nasdaq Industrials customers.

What does this mean for investor relations?

  • When investment decisions operate along defined sector lines, as they have so far in 2022, the highly correlated nature of markets means that company fundamentals can take a back seat somewhat. However, that doesn’t mean IR professionals should wait for the storm to clear.
  • Maintaining ownership should take precedence over developing, but the extent to which this should happen depends on several factors, including the sector, the extent to which it is subject to risk and interest averse capital outflows incoming investors.
  • Investors are likely to hold several securities from the same sector in their portfolios from which they can reduce their positions. As such, an understanding of an investor’s exposure within the peer group is key to understanding how to position your business against the competition.
  • Finally, while building ownership can seem like a thankless task in times of heightened volatility, building a pipeline of potential investors using an effective investor targeting strategy is important in order to get started on the rails when markets return to normal.

In this market environment, context is critical to effectively positioning your business to withstand external market factors while maximizing opportunities resulting from continued investment capital rotations.

Nasdaq’s advisory team has extensive experience across industries and a unique set of proprietary tools, providing valuable contextual insights and helping clients connect to new capital flows. For more information on how Nasdaq can help your business with its IR program, please contact the team.

Shirlene J. Manley