Last year, US-led trade tensions and emerging market troubles rocked global markets, throwing up pockets of volatility throughout the year. In Europe, economic data and earnings growth remain robust but the equity market has been buffeted by bouts of indiscriminate selling due to prevailing geopolitical storms. While macroeconomic shifts do not influence our investment process and decision-making, this type of short-termist trading erodes investor confidence and pushes up volatility in the market.
As low-turnover, bottom-up investors, our focus is on stock fundamentals and we are seeing growing signs of an increasingly asymmetric market. Stocks have become more sensitive to any negative earnings surprises, while conversely, earnings beats are not being relatively rewarded. With this shift in risk / reward dynamics, we are continually assessing risk management in relation to the sizing of positions. In a highly sensitive market, it can pay dividends to take a more incremental strategy in building positions, to allow for more flexibility amid volatility flashpoints.
On the positive side, the top-down and bottom-up trends that have re-awakened volatility are also creating opportunities to exploit market flux and take advantage of attractive entry points. It is this type of market that tests the skills of an active contrarian investor. As investors brace for a potential new stage in the cycle, I discuss the ten lessons of contrarian investing I have learned over two decades of analysing European equities.