Old Mutual’s Ian Heslop is gearing up for a “massively unstable”, sentiment-driven market in 2017, believing that investor jitters will remain in place despite a relatively benign economic backdrop.
The manager’s Old Mutual Global Equity Absolute Return fund emerged from 2016 relatively unharmed, notwithstanding a similar set of concerns, and he said investors were in for more of the same in 2017.
The $7.1bn (£5.6bn) long/short strategy returned 2.4 per cent last year, but this was only following a sharp turnaround in early September.
Mr Heslop, who runs the fund alongside co-managers Amadeo Alentorn and Mike Servent, said: “We had a pretty good end to the year. But it sounds like flat is the new up.”
The manager said he expected sentiment to waver on several occasions in 2017.
But unlike the active managers who have predicted a better environment for stockpicking this year, he said sentiment-driven markets would not aid either his long or short books, especially given political uncertainty.
He added that investors were likely to fail again in predicting market movements following binary outcomes.
“What has been interesting is that you were not able to predict the impact [of recent events] on the market,” he said.
“Even if you got [the Brexit vote] right, you would have got the market wrong. That is likely to be the same [this year].
“You’re making two forecasts with events: the event itself and then its impact on the market, and people found it very difficult to do both.”
However, the manager – who also runs US, global and global income strategies – said he didn’t expect macro events themselves to cause havoc in markets.
“We’re not going to be blindsided by macro going forward as it is relatively stable, but sentiment is going to be massively unstable in the next 12 months given the Dutch, French and German elections, and a person whose policy is fluid sitting in the White House,” he said.
Sector-specific risk could reach new highs this year, according to Mr Heslop. He said central bank interference had made it easy for investors to get caught up in momentum plays, but predicted 2017 would see an end to this process.
He also urged caution on expectations for sector returns.
“The adjustment of the [US Federal Reserve] policy and –if [Donald] Trump does have a fiscal stimulus – economic policy will have to change and rates will rise more quickly,” he said.
“Normalisation will occur more quickly than people expect, and that will lead to instability in the ideas of momentum or trend.
“[The president] goes on Twitter and individual stocks are hit by whatever he is saying. But what is more interesting is his viewpoint on policy areas, like the clean air act, healthcare, exporters, car [manufacturers].
“There will be greater volatility at a sector level than historically, but only because sentiment towards those industries will be unstable.”
Mr Heslop said his 2016 returns were derived equally from the long and short books. But he remained cautious on the prospects for both in the year ahead.
“The short book isn’t there as a hedge to the long book – we’re much more interested in them both as alpha generators,” he added.
“In 2017 we’re going to be in an environment where volatility is difficult to predict.”
