As I write on Tuesday, the market is full of unanswered questions. Article 50 and Brexit are looming. We’re waiting to find out whether the US Federal Reserve will increase interest rates in March. If it does, will the Bank of England follow suit later this year, now that inflation is rising?
The outlook for oil and energy prices is also uncertain. The price of crude oil has fallen by 10% over the last week. Fears that US shale producers will flood the market and cancel out OPEC production cuts have led to a widespread selloff. On the other hand, it’s also possible to argue that this pullback is just a routine period of consolidation in the longer-term recovery of the oil market.
Whatever happens, changing energy prices, interest rates and inflation will affect many of the stocks we invest in. So should I be tweaking the Stock in Focus screen to search for companies that might benefit from higher interest rates or cheap oil? I don’t think so.
Predicting the future is just too difficult. There are so many variables involved that I’m almost certain to guess wrongly. If hedge funds with supercomputers, teams of PhDs and huge archives of data can’t get it right, what chance have I got?
More importantly, the SIF portfolio is driven by stock-specific fundamentals and quantitative factors. This bottom-up approach is at odds with the top-down approach I’d have to use if I wanted to direct my exposure to specific sectors of the market.
How I handle macro risks
I won’t be making any changes to my investing policy for the SIF portfolio in the light of macro developments, including Brexit. I’m confident that if the economic environment changes, I’ll be able to rely on the fundamental criteria in my screen to highlight potentially attractive stocks.
Of course, this doesn’t mean that I don’t pay any attention to macro risks. My defence against the unknowable is to try and maintain a reasonably diversified portfolio. Sometimes, this means rejecting stocks I might otherwise buy.
One example of this is City of London Investment Group. This high-yielding small-cap fund manager has qualified for my screen this week. Unfortunately I already own a small-cap fund manager in the form of Miton Group, so CLIG isn’t an option.
A defensive opportunity?
One of the biggest and most persistent problems I’ve faced in building the SIF portfolio has been…
