Adopt the brace position: Why it's time for investors to get active
Stocks face a new normal in 2018 and that's unsettling.
Is the volatility going away? No. Is Donald Trump going to stop tweeting? No. Why are investors selling stocks on one Trump tweet and buying them back after another? Blame the Fed!
Few market participants guessed that the Federal Reserve lifting interest rates, while retreating from quantitative easing would provide such an emotional journey.
NN Investment Partners found that emotion over global equity markets has greatly deteriorated since early March, to its weakest level since early 2017. Optimists cite global expansion, but NN also tested that theory. Its Global Cycle Indicator captured over 70 household and business surveys globally and revealed that, for the first time since 2016, business cycle momentum was no longer improving, compared to three months earlier.
Valentijn van Nieuwenhuijzen, CIO of NN, said this explained why the market has become more exposed to risk factors stemming from politics or headwinds for the technology sector.
Tax reform, regulatory reform and infrastructure spending should have encouraged greater capital spending to stretch out the economic cycle, but c-suite confidence has been sapped by tough trade talk, Syria and every other threat Trump makes.
Volatility tends to rise as we reach the end of the cycle as business takes more risks, said Kokou Agbo-Bloua, global head of flow strategy and solutions at Societe Generale.
Few are advocating investors "hit the side-lines." Instead, active managers eager to prove their worth and reverse the stampede into index trackers like ETFs, suggest long/short equity strategies, market neutral to avoid volatility, good old-fashioned stock picking and protection.
Bonds typically provide shelter when equities sell off — but they didn't in the February rout. Agbo-Bloua said investors can no longer rely on bonds, so need to think about owning protection.
Others like David Miller, investment director of Quilter Cheviot, recommend embracing the volatility as you can't just buy the index and sit back. But Miller disagrees with hedging as the cost can destroy returns.
Raking through the Stoxx 600 serves up trading ideas. Deals, dispersion and earnings.
The top performing European stocks in 2018 are takeover plays such as biotech firm Ablynx, which is being taken over by Sanofi; NEX Group, thanks to an approach from CME Group; GKN, after Melrose has fought to acquire it; Smurfit Kappa, after an unsolicited approach from International Paper; and Ocado as it inks international deals.
Luxury also crops up thanks to stronger earnings. LVMH hit a record high last week after reporting.
U.K. heavy hitters, Tesco and Easyjet, have decoupled from their indices and sectors this year. Ralph Jainz, fund manager of Centricus Asset Management, said the U.K. has huge dispersion with some of the must undervalued and overvalued names thanks to Brexit uncertainty.
If you haven't done so already, change your game plan for 2018.
—Karen Tso is an anchor on Squawk Box Europe, CNBC and you can follow her on Twitter @cnbckaren.
For more insight from CNBC contributors, follow @CNBCopinion on Twitter.