Ian Heslop, head of global equities at Old Mutual Global Investors, has said investors should expect the recent bout of underperformance in equity markets to continue, and diversification is the key to returns.
Mr Heslop, who jointly runs a range of global, US, Asian and Absolute Return funds at the firm, said “it is logical to think that if low interest rates and quantitative easing helped to push asset prices up, and there is a lot of reason to think those policies have, then the ending of those policies will see asset prices struggle”.
But he admitted as a change in policy like the withdrawal of QE stimulus has not happened before, so to some extent investors are in uncharted waters.
Typically central banks put interest rates up when economic growth is strong and inflation rising, and in such a scenario equity investors know which style of investing is likely to perform well.
But as Mr Heslp pointed out, now rates are rising without inflation being a particular problem, creating uncertainty.
He said a world where interest rates are rising is usually the time to avoid the “growth” sectors of the market, and this should be bad for the big technology shares right now.
But value investing, which typically comes into force when interest rates are rising, may not perform well now because of the lower growth and inflation rates, he said.
Jacob De Tusch Lec, who runs the £3.8bn Artemis Global Income fund, said he has been positioned for value stocks such as banks to perform better when volatility increased, and has been surprised this has not worked.
Mr Heslop said the remedy to such uncertainty is diversification, rather than trying to choose an investment style of predict the outlook for the economy.
He said the unusual monetary policy conditions mean that even if an investor can correctly forecast what is likely to happen in the economy, it will not be simple to understand how the economics will impact the market.
A hint of what may be to be come for equity markets occurred on 25 April when the yield on the US ten year government bond rose to 3 per cent.
David Roberts, head of global fixed income at Liontrust, said that historically the US government bond yield reaching 3 per cent has been an indicator that equity markets will sell-off, as this has happened in the past.
But he said the indications are that an economic downturn remains a distant prospect.
Ben Whitmore, who runs the £2.3bn Jupiter Income Trust said the recent turmoil in markets has prompted him to invest more in the UK market, despite running some global funds.
He said UK shares are now trading at a discount to the rest of the global equity market that is attractive.
Jonathan Davis, who runs Jonathan Davis Wealth Management in Hertford, said he is more bullish on equities than at any time since 2009, he said he expects inflation to keep rising, which is bad news for government bonds.
David.Thorpe@ft.com
