Managers voice equity fears as stimulus fails to appear
Groups’ fears fuelled by potential fiscal cliff and recession in the US and European Central Bank delays.
A series of leading fund managers have spoken out to warn investors of potential equity market trouble ahead, after the European Central Bank (ECB) last week failed to deploy liquidity into the eurozone as expected.
Prices have remained resilient on stockmarkets in recent months, with the FTSE 100 index of major UK shares trading at more than 5,750 points on Friday (August 3), in spite of the fact that major economies continue to slip further back into recession.
In a press conference on Thursday ECB head Mario Draghi failed to unveil any firm plans for a eurozone stimulus package, as had been widely expected due to earlier remarks that the ECB was prepared to do “whatever it takes” to save the euro.
RWC’s equity income star Ian Lance said in the context of unclear levels of central bank support, current market prices look risky.
He said the market’s strength reflected the fact it was being underpinned by solid valuations on stocks seen as defensive ‘safe havens’ – such as tobacco, beverages, utilities and stocks benefiting from growth in Asia.
“They have become the equity equivalent of German and Swiss government bonds, and our own experience is that paying all-time high valuations for anything is not a great wealth-creating technique,” he said.
The manager of the £132.8m RWC Income Opportunities fund added that there were “huge amounts of earnings risk in the market”, as earning are coming off all time highs “and have been aggressively revised down”.
Mam Funds’ £831m CF Miton Special Situations fund manager Martin Gray – a top quartile manager over the five and 10-year timescales – predicted a month of equity falls that could match the 7.3 per cent UK market slump seen in May.
“If you had asked at the start of the year what the first two quarters of [economic growth] would be in the UK, I don’t think people would have said – given that information – that the market would be bursting through 5,700 and running away,” he said.
“The situation is the same in the US.”
While the UK and many eurozone areas are battling recession, the US economy is still growing. US fund managers last week told Investment Adviser that this could be about to change.
PSigma’s star US fund manager James Abate warned that the US “appears to be on its way to joining Europe in recession in spite of monetary policy being at its most accommodative”.
Neptune’s £408.7m US Opportunities fund manager Felix Wintle said the US’s looming ‘fiscal cliff’ needed to be surmounted to avoid an inevitable recession.
“If the politicians do nothing and let all these tax cuts and stimulus measures expire the US economy will go straight to recession,” he said, adding that the effect on US growth would be a 3 percentage point decline in output.