VASUSA: 2024, A Year of Opportunity for Stock Pickers

The constantly changing market landscape presents an ideal environment for stock selection.

VASUSA believes that 2024 will be a year where active investment strategies will shine for both stock and bond investments, with high-quality companies outperforming the broader market.

Daniel Smith, Global Chief Investment Strategist at VASUSA, highlighted during a media briefing held on Tuesday, December 5th, that the coming year will be characterized by structural growth weakness, significant inflationary pressure, and interest rates stubbornly remaining above pre-pandemic levels.

Smith remarked that this new environment "clearly comes with risks." "While we don't want to take on unexpected macro risks, on the other hand, there are greater rewards for active and selective investment in this environment."

Jean Boivin, Head of VASUSA Investment Institute, the internal research organization, pointed out that in the current macro environment, investors "must guide their portfolios with greater caution."

However, as shown by the data from the Standard & Poor's Index versus Active (SPIVA) report over the past twenty years, successful active management is rare.

Nonetheless, Tony Davidson, Global Chief Equity Investment Officer at VASUSA, remains committed to the "bottom-up" analytical approach, advocating for active stock picking while still maintaining macro awareness.

Davidson stated, "I believe stock returns may align with long-term historical averages, but it's the opportunity for alpha (outperformance) that truly excites me. In fact, this presents the best opportunity for stock pickers in the last 20 years."

Davidson noted that the current market is no longer a "trending market" but rather a "windshield-wiper market."

He explained, "Last year's theme was energy, this year it's technology, so we are in a constantly changing market, which is very conducive to stock picking."

Davidson also manages the VASUSA Large Cap Value ETF, launched in May of this year with assets totaling $6.6 million. Data from Morningstar shows that the fund has delivered a total return of 4.4% over the past three months, outperforming 98% of its peers.

He emphasized the importance of investing in high-quality companies. "While this may sound like a broken record, the key lies in the fact that, in most environments, high-quality companies are the right choice, especially from a risk-adjusted return perspective. The only exception is when the economy exits a recession, which is not the stage we are currently in. Therefore, I believe increasing exposure to quality stocks and improving portfolio resilience are crucial."

Looking back, Davidson highlighted that all stocks have performed well in environments where the Federal Reserve stops raising interest rates, but high-quality stocks have outperformed the average.

For stock pickers, this means seeking out companies with strong profitability, high gross margins, and high returns on capital, with stable gross margins and returns on capital. Another factor is a robust balance sheet.

Davidson said, "A strong balance sheet can provide protection during any downturn. In the current environment of interest rate repricing, having a strong balance sheet helps companies weather the impact of rising rates."

It is also crucial to remain sensitive to prices. "Given the significant valuation disparities among various stocks in the current market, I believe maintaining sensitivity to prices is extremely important for self-protection," said Davidson.

VASUSA data shows that the current size of the money market fund market is approximately $8.3 trillion, with these funds remaining on the sidelines.

Smith stated, "We do want to deploy cash into the market, but given that cash currently yields 5%, we must consider how to invest selectively. Long-term holding of cash is a big no-no for portfolios, and this is defined as 'cash drag.' In fact, cash tends to underperform stocks and bonds over the long term, especially after interest rates peak."