TEAM plc Chief Investment Officer Craig Farley caught up with DirectorsTalk for an exclusive interview to discuss the main drivers behind Q1 performance, the importance of Powell’s poker tell, the group’s positioning into Q2 & the rest of the year, and the strategy to deliver risk adjusted returns.
Q1: Craig, could you just discuss for us the main drivers behind your Q1 performance? It seems risks assets have staged a comeback?
A1: Yes, that’s right. I think there’s a few market narratives playing out.
I think it’s worth recalling that at the beginning of this year, the odds of a global US-led recession were still anywhere between 30-50%, according to several credible sources and surveys of professional economic forecasters and strategists. As we’ve moved through this quarter, those odds have been significantly reduced as markets have adjusted to a no landing scenario in 2024, based on the resilient macro data we’ve been seeing.
Second, we’ve had an accelerating arms race to invest in this emerging AI theme, that has really been broadening out from the Mag 7 in the US to capturing investors’ attention in other markets and regions.
Finally, we’ve had synchronised dovish Central Bank activity so markets had become jittery into quarter end, we had several hotter than expected inflation and jobs reports and that was suggesting a potential delay to interest rate cuts this year. Powell quickly restored calm, at least temporarily, by reiterating three cuts for 2024 at the FOMC meeting.
Really, all of these factors combined, to power risk assets higher and we saw major developed markets including the US, Europe, and UK, touch all-time highs and deliver very strong performance over the quarter.
Q2: What’s the importance of the Powell ‘poker tell’ as you describe it?
A2: So, at that very same FOMC meeting, at the press conference following that, Chairman Powell stated several times that the Fed’s plan was to bring inflation down to this 2% neutral target over time. That could, and probably is, being interpreted by markets as really a soft removal of that 2% target, or at least providing the Fed with some wiggle room to get there.
In our minds, the Feb has really signalled its position here, by acknowledging that its dual mandate of i) achieving long term price stability and II) maintaining full employment, that’s really reached a point of tension in this market cycle. Powell and his colleagues are now shifting the policy priority away from fighting inflation and towards maintaining maximum employment and financial stability.
Q3: So, what’s next? What is TEAM’s positioning as we head into Q2, and for the rest of the year? And who do you think will be the winners and losers in your view?
A3: I think the journey for equities has an incredibly smoother vertical ascent so far this year with very little setbacks. I think in a historical context, it would be extremely rare for markets not to at least pause for breath at some point, and we’re seeing that now, particularly given the readthrough from positioning and sentiment levels.
Our own high level asset allocation here remains overweight equities in terms of positioning, and underweight fixed interest, and really neutral to alternatives with a modest cash allocation.
If I take those in turn, within equities, we’ve retained a healthy split between US and non-US equities with a skew to large cap companies, nothing too complicated here. We just feel in a world in which the cost of financing remains high and relatively painful for smaller companies, that bigger is better in this regard.
We’ve been leaning heavily into the US technology leadership, into Japan, and into India in this post pandemic cycle but we’ve taken some chips off the table in the short term and rotated some of that exposure into the more under-loved cheaper market of Europe, the UK, and latterly China which we do feel has the potential to positively surprise investors this year.
In the fixed interest sleeve, after markets travelled such a long way in a short space of time at the back end of 2023, it was little surprise that returns were more subdued in the first quarter, despite assurances from central banks that interest rates cuts were coming down the pike soon.
Our stance really here is that boring and pragmatic should be the position adopted. Boring really just means not leaning too hard over our skis in this search for yield, focusing on good quality credits that offer us attractive yields, and also some balance sheet strength to withstand any periods of market turbulence.
In this world, our preference is certainly for investment grade corporates over government and high yield. The pragmatic element really is remaining open-minded, flexible, and nimble, and really willing to adjust our positioning quickly should the facts change.
Finally, on the alternative side, physical gold and gold miners remain essential portfolio insurance whilst energy equities continue to offer genuine asset and sector diversification. Both of these pockets have offered meaningful performance value to our strategy range year to date.
I think on oil, further supply disruption remains a distinct possibility and we’re seeing that playing out real time at the moment. Indeed, a renewed oil rally in the oil price in the months ahead probably remains one of the key risks for the Biden administration for the Feb and for global markets, given the natural mechanism from oil through to forward looking inflation expectations which we are starting to see tick up in recent days.
That alongside continued hot economic and jobs data would be another probably troubling development for the Fed and give it a headache with regard to the path for interest rates ahead.
Q4: Could you just discuss the importance of your systematic investment process, and how does it help to deliver risk adjusted returns?
A4: So, here at TEAM, rather than try and look round corners and predict outcomes, we rely heavily on our systematic investment process that you’ve highlighted.
The framework really was developed in late 2020, following an intensive period in research and development, really with a view to riding strong price trends across our allocation menu and always paying careful attention to correlations and volatility of our assets to ensure diversification through cycles.
Ultimately, our framework has been designed to keep us within our mandate guidelines and really prevent us from acting impulsively on any short term market noise and really, that impulsive action can often impede long-term investment outcomes.
This post pandemic cycle continues to be a great stress test for the strategy. We’ve experienced an array of market conditions and, touchwood, so far, we’ve been pleasantly satisfied with performance outcomes.
