Stocks plummeted last week following a month of steadily down markets across all major equity indices, with several hitting close to double digit declines since the falls started in early September.
Performance of indices since 04 Sep 2014
Source: FE Analytics
However Willis says the market correction was healthy rather than a forewarning of further woe as it was not caused by fundamentals and global growth appears to remain sound.
Therefore it constitutes a reasonable entry point for investors.
“Last week was another volatile week for markets, with significant intraday swings in both equities and fixed income. The centre of the storm was Europe, where concerns over the lack of growth and deflation led to a significant sell-off in core and peripheral European equity markets and peripheral government bond spreads widened over German bunds,” he said.
“Last week was ugly but it is worth remembering that, globally, growth remains reasonable – there is no evidence of a major slowdown in global gross domestic product.”
“We are not on the brink of a global recession and whilst growth in Europe is mediocre, any further deterioration may well force the European Central Bank to take more action. It is also positive that the Bank of England and the US Federal Reserve have hinted at rates staying lower for longer.”
Willis says he doesn’t expect the recent uptick in volatility to end soon as sentiment is not being driven by a single factor.
However, he adds that the fundamentals suggest the sell-off was overdone in the short term and that recent data may overstate the spectre of a deeper period of weak markets.
“The market had gone a long time without a correction and we saw the sell-off last week as completely normal, particularly given the time of year,” he explained.
F&C’s MM Navigator range of funds is run by Gary Potter (pictured) and Rob Burdett. Its largest vehicle, the £900m F&C MM Navigator Distribution fund, has built up cash in 2014 of which a portion has been used to equity positions while futures short positions have been scaled back and the team is eying further US exposure.
“From an asset allocation perspective, we are discussing adding to the US, but remain slightly underweight for now, and we also remain underweight emerging markets.”“We are neutral on the UK and Europe and positive on Japan and Asia. We prefer equities to fixed income and have added to some fund holdings and trimmed futures short positions,” Willis said.
Willis says there are significant headwinds to the F&C team’s exposure to Europe across the MM Navigator range of funds but the market has overly discounted the risks.
He said: “Economic data out of Europe added to worries as inflation data continued to be mediocre and business surveys in Germany were weaker than expected.”
“We don’t deny the outlook for European growth is weak but the recent data may overstate how bad things are. In the meantime, the pressure of volatile and falling markets, on both the European Central Bank and politicians, is not necessarily a bad thing.”
One of the key concerns for investors has been the perception of sluggish progress in creating agreement between the major European financial institutions amid the threat that falling inflation may turn into deflation.
“It is clear Mario Draghi has used up almost all his bullets and needs some political momentum in terms of structural reforms to underpin future growth, as well as more flexibility from the Bundesbank to allow the ECB to move towards full quantitative easing.”
“It would be no bad thing if the market wobble forces some compromise between the Germany and the ECB, and accelerates reforms in France and Italy,” Willis said.
“Thinking longer term, we should be mindful that western central banks will do whatever it necessary to avoid deflation given the levels of debt, both private and sovereign, in developed economies. Weak inflation also means there is scope for monetary easing elsewhere, not least in China.”
The £990m F&C MM Distribution fund was launched in October 2007. According to FE Analytics, it has returned 36.03 per cent, beating the IMA Mixed Investment 20%-60% sector by close to 15 percentage points in the process.
It also boasts top quartile returns over three and five years and is second quartile over the last 12 months.
Potter and Burdett’s fund has outperformed the sector in every year since its launch, except in the falling market of 2011 when it was third quartile with losses of 4.8 per cent.
The managers count UK income funds such as JOHCM UK Equity Income, Ardevora UK Income and Schroder Income Maximiser as top 10 holdings, as well as fixed income portfolios such as PFS TwentyFour Dynamic Bond and Schroder Strategic Credit.
