The head of global equities at Merian said he was surprised at the strength of the rally in global stock markets since the start of 2019, given that the fundamental drivers of equity prices have largely been unchanged.
But he said while current economic uncertainty meant the anticipated rises in interest rates around the world will likely be delayed, and this had provided some relief for equities, it will not be enough to prevent volatility rising.
Mr Heslop said one of the reasons equity markets performed strongly, and with little volatility, in the decade since the financial crisis had been the policy of low interest rates and quantitative easing.
Mr Heslop said: "While interest rates not rising is positive, it is the other extraordinary measures taken since the financial crisis, such as bond buying by central banks (QE) [that] has happened, and even if that pauses as well, it won’t stop volatility rising, if would have to be reversed for that to be the case."
The bond buying programme of central banks reduces volatility in equity markets, according to Mr Heslop, because it pushes extra cash into the system, helping to ensure there are more buyers of shares.
But central banks have been curtailing bond buying, increasing volatility. In addition, by buying fewer bonds, the yield on bonds will rise, and this is also bad for equities.
The fund manager said the decision by the US Federal Reserve to pause interest rate rises had been the central reason for strong stock market performance since the start of the year.
Higher interest rates are bad for equities, as they increase the returns available on lower risk assets such as bonds and cash. Higher rates also increase dent the returns of companies, as borrowing costs rise, while consumers have less spending power.
He said: "It may simply be that the sell-off in December was overdone and the rally is strong because of that. But the big driver of equity valuations is monetary conditions and they have not changed that much."
Mr Heslop said he expects volatility to continue to rise towards historically normal levels, and for there to be bouts of extreme volatility in the short term.
This has led him to prefer parts of the market that are less economically cyclical, one example being insurance companies.
He said global economic conditions do not justify investments in companies that are reliant on a strong global economy for growth, as less liquidity in the global system is not positive for growth.
Meanwhile Bruce Stout, who runs the £1.6bn Murray International investment trust, said the fact markets are going up because interest rates are not rising was an example of "cognitive dissonance" from investors, because the reason rates are not going up is because of weaker economies, and weaker economies do not justify higher equity prices.
David Scott, and adviser at Andrews Gywnne in Leeds, said the global economy was in a "far more precarious" state than the headline statistics implied, and with this in mind he continued to be cautious on global equities.
david.thorpe@ft.com
