Stock picking: deciphering what’s signal and what’s noise

Public markets (traded daily like equities and fixed interest) absorb all new information today and try and instantly work out what that means for future interest rates, share prices, commodity prices and just about everything else that can be valued. Private markets like art, classic cars and watches move more slowly and there can be large gaps in pricing from one pricing event (usually an auction) to the next. The concept of ‘price discovery’– knowing the value of an asset– is one of the major goals of a well-functioning public market. 

To the casual observer, some of these moves seem quite dramatic for assets that are meant to be around forever, like a listed company. In fixed interest there are well telegraphed long term targets around inflation that should steer the market on what to expect. Deciding when to react to these moves is a key skill of active managers – can we separate the important signals from the distracting noise?

Looking back over the past 18 months, we can see some large shifts in sentiment and consensus views, especially last calendar year, and their subsequent impacts on assets prices. The consensus is an average view, meaning there are always opinions counter to this. Holding those non-consensus, or contrarian, views, based on deep expertise and experience is often the way active investment managers like Octagon add value to their client’s portfolios. 

At the start of 2023, there was a broad consensus that central banks had raised rates enough to slow demand and more than likely create a recession - an unfortunate but necessary step in bringing inflation back to long term targets. In March 2023 it appeared that this consensus was playing out in the mini-banking crisis triggered by the failure of Silicon Valley Bank (SVB) in the US. Equity markets fell nearly 10% and interest rates fell even more (boosting the return on fixed interest assets). Swift action by global central banks restored faith in the banking sector.