Please see below, an article from EPIC Investment Partners analysing the key factors currently affecting global investment markets. Received this morning – 04/02/2025
They say that if you see a £20 note lying on the floor in a financial market, it is probably gone before you can pick it up. But, in today’s world of shifting geopolitics and evolving investment trends, that £20 note might just be sitting there, waiting for someone who is paying attention.
Recent research by Haddad, Huebner, and Loualiche sheds light on how passive investing has reshaped financial markets. Over the past two decades, the demand for individual stocks has become 11% more inelastic as passive strategies have grown. This indicates that prices are less responsive to changes in demand, creating inefficiencies that active managers can exploit. While active investors do adjust to fill some of the gaps left by passive flows, they only offset about two-thirds of the impact. In other words, opportunities are out there for those willing to look.
This backdrop is particularly relevant as global trade relationships face growing strain. The potential decoupling between Western economies and China, or even broader shifts in trade alliances, could lead to significant reallocations in government debt holdings and equity markets. For example, if China were to reduce its exposure to U.S. Treasuries as part of a geopolitical strategy, the low elasticity in these markets suggests that active players might not immediately smooth out price distortions. Similarly, as companies localise supply chains to mitigate tariff risks, equity markets may witness mispricing in sectors undergoing structural shifts.
In fixed-income markets, the growing proportion of passive ETFs tracking government or corporate bonds could amplify price distortions during periods of stress. Active managers can step in to provide liquidity and capitalise on these inefficiencies. On the equity side, stocks with lower index representation, such as small caps or niche industries, may offer outsized opportunities as passive flows overlook them.
The broader takeaway is clear: while passive strategies offer simplicity and low costs, they rely on active participants to maintain market efficiency. In an era marked by geopolitical uncertainty and structural economic shifts, active management continues to show its relevance. By identifying mispricing and adapting to changing conditions, active managers can deliver value that passive strategies simply cannot.
So here is the punchline: if you are an active investor today, that £20 note is not gone, it is still right there for the taking. And in tomorrow’s market? It might just be a £50 note instead.
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Alex Kitteringham
4th February 2025