Although the UK markets have struggled over the past few days, with no clear direction evident, this follows a year of major gains.
At the time of writing, the FTSE All Share and S&P 500 are up by more than 30 per cent over the past 12 months and the MSCI AC World index is up 29.9 per cent, according to data from FE Analytics.
Performance of indices over 1yr
Source: FE Analytics
Many analysts put the market’s recent wobbles down to concerns about the eventual end of quantitative easing, which would itself be a sign of a healthier economy.
However, Bruce Stout, manager of the Murray International Trust, warns that the lack of economic growth despite the massive QE programmes undertaken shows that market gains are built on sand.
"The complete lack of economic traction in response to persistent money-printing is a macroeconomic reality that appears not to register in the minds of global central bankers intent on debasing their respective currencies," he said.
"So quantitative easing prevails and the world continues to stagnate. Whilst such policy irresponsibility dictates, capital preservation remains key. The portfolio’s predominately defensive positioning will be maintained."
Ed Beal, manager of the Dunedin Smaller Companies Investment Trust, points out that without economic growth, re-rated companies will find it hard not to see their valuations slip back again.
"It needs to be remembered that corporate profit margins are at or around peak levels," he warned.
"That means earnings growth will, in the main, have to come from sales growth."
"The global macroeconomic environment means that there is therefore a heightened risk of earnings disappointment; this is particularly the case for companies with a second-half bias to their profit expectations."
"Any disappointment could be harshly treated when one considers the re-rating that many companies have experienced."
While most optimism seems to centre around the relatively strong performance of the US economy, Beal reminds investors that it was only six months ago the world was worried about the US debt ceiling.
"Recovery in the US would be expected to become more difficult as sequestration really bites and further austerity measures seem likely if there is to be agreement on the debt ceiling negotiations," he said.
The manager also warns that the eurozone crisis is merely sleeping.
"The European debt crisis is unresolved. The OMT remains untested, indeed its real strength lies in that fact."
"If bond investors begin to lose confidence in the authorities’ ability to protect the euro, we could find ourselves back in the midst of a crisis."
Stout’s Murray International Trust has performed strongly over the past 12 months, despite the manager’s scepticism about the companies leading the rally, about which he spoke to FE Trustnet in a previous article.
Our data shows it has made 39.21 per cent while its custom benchmark is up 31.4 per cent.
Performance of fund vs benchmark over 1yr
Source: FE Analytics
Beal’s fund has beaten its benchmark by an even bigger margin, returning 56.7 per cent while the FTSE Small Cap index has made 45.7 per cent.
Performance of fund vs index over 1yr
Source: FE Analytics
Jeremy Whitley and Ben Ritchie, managers of the more large cap oriented Dunedin Income Growth Investment Trust, say that the boost given to markets by quantitative easing may have run its course.
"Despite strong equity market performance in 2013 thus far, we retain a cautious outlook," they wrote.
"A large part of the global economy is struggling to grow amidst deep fiscal adjustments, and the support offered by monetary policy is perhaps nearing its limits."
"We take comfort that within the portfolio, valuations do not look too demanding despite pockets of re-rating as operational performance has been broadly robust and balance sheets are generally in good shape."
"This leads us to believe that the outlook for the distribution of dividend payments from our investee companies looks reasonably sound."
Charles Luke, manager of the Murray Income Trust, says that the real effect of the policy may simply be to increase prices rather than to improve fundamentals.
"Although economies in mature markets have started the healing process, quantitative easing has to date been more successful in increasing asset prices than accelerating the pace of economic recovery," he said.
"We believe the outlook remains difficult and opaque. High levels of consumer and government debt, stress in the financial system, the future impact of austerity measures and challenges related to economic rebalancing remain significant barriers to enduring growth."
Luke acknowledges that the world is significantly better off than it was a year ago, however.
"Conditions have improved given the reduction in the most serious tail-risks surrounding a collapse of the eurozone," he added.
"Although aggregate corporate earnings have yet to be upgraded, we are at least beginning to witness a period of stable delivery relative to expectations."
"Those companies able to generate sustainable organic growth have continued to re-rate, but in aggregate, valuations look quite reasonable, particularly so on a relative basis."
In its most recent note to investors, Aberdeen’s Asian equities team, which runs the Aberdeen Asian Income trust among others, said that investors should not believe that the region is immune to the problems besetting the rest of the world.
Asian markets could see a correction of their own in the coming months, they warn, although QE should ensure this is still some way down the line.
"Looking ahead, consensus earnings forecasts appear too rosy, given the current lacklustre macro-economic backdrop."
"Downgrades to these estimates in the months ahead could trigger a stock market correction."
"However, with Japan joining the US and Europe in printing cash, we would expect the ample liquidity to continue supporting asset prices for some time to come."
The managers reaffirm the long-term growth potential of the continent, however.
"We remain optimistic about Asia’s long-term prospects, as economic fundamentals in the region remain robust, while corporate profits are likely to continue growing, albeit at a slower pace."
