Equity markets are yet to recover from their six-week plummet - beginning in September - as investors cut risk in the face of growing skepticism of a recovery in the eurozone and a wide range of geo-political concerns, namely the conflict in the Middle East and the spread of the Ebola virus.
Performance of indices since 4 Sep 2014
Source: FE Analytics
Tim Stevenson, manager of Henderson EuroTrust, says he is positive that markets will bounce back as he believes the recent sell-off was primarily caused by macro hedge funds deleveraging short positions.
“As normal investors don't seem to be panicking it suggests that it is more a case of hedge funds unwinding and de-gearing positions and recover mistakes that they have made earlier in the year,” he argued.
“In spring you had some of the macro hedge funds deciding to sell anything in emerging markets and stuff it all into Europe and now they all think it was premature, so you have the fast money moving around.”
Sheikh (pictured), who runs a host of multi-asset portfolios at JP Morgan Asset Management, including the £330m JPM Multi-Asset Income fund, says recent volatility has reminded investors of the delicacy of the global economic recovery, but economic fundamentals remain unchanged with markets overreacting to fears of prolonged weakness.“In our view, the sell-off was driven primarily by a resetting of global growth expectations. Some US data was softer than hoped and on the international front a downbeat IMF forecast, growing geo-political risks and disappointment over the pace at which the ECB will deploy stimulus added to the general malaise,” he said.
He says increasingly wary investors have been herding around a bearish sentiment while largely disregarding markedly positive data suggesting fundamentals remain intact.
“Notably on Thursday, initial jobless claims fell to lows not seen since 2000, beating estimates. Industrial production was likewise strong. Yet S&P futures were little moved in the moments following either bullish signal.”
“Broadly US economic indicators such as PMIs recently are only marginally lower. While European growth fears cannot be so readily dismissed, the US economy has unrivaled domestic strength and depth and so does not have a history of importing other regions’ recessions.”
Sheikh says price action by traders has been centered on a few crowded positions while falling commodity prices will give consumers extra spending power.
“Sharp moves in European equity, high yield, peripheral debt, and US Treasuries are symptomatic of a washout of crowded trades.”
“Lower commodity prices, particularly energy, will ultimately boost US consumers and businesses—assuming it is a supply, not a demand issue. Recent weakness in oil indeed appears overwhelmingly a supply side phenomenon.”
He says this will allow the Fed to maintain a loose monetary policy for longer despite stronger domestic growth.
“This serendipitously benign monetary backdrop allows for further healing in areas that have lagged the recovery thus far – notably housing, where mortgage credit availability has not kept pace with the rebounding economy.”
The four crown-rated JP Morgan Multi Asset Income fund is top quartile over one, three and five years.
It has returned 42.88 per cent over the past five years compared with 20.44 per cent from the IMA Mixed Investment 20%-60% Shares sector.
Performance of fund and sector over 5yrs
Source: FE Analytics
The period since the correction has been a difficult one for most funds with no multi-asset fund in the IMA Mixed Investment 20%-60% Shares sector making money. Sheikh’s fund performed broadly in line with the sector average.
Performance of fund and sector since 4 Sep 2014
Source: FE Analytics
Talib says he is maintaining a belief that the US economy will continue to accelerate, with improving confidence from this boosting global growth.
This has led him to hike positioning in the JPM Multi Asset Income fund to a heavy overweight in equities while keeping a short position in five-year US treasury futures as a hedge against interest rates.
“In our view, the headwinds of uneven global growth and the drag of a stronger dollar on earnings are probably balanced in the medium term by the tailwinds of lower energy costs and lower costs of financing. This reinforces our structural overweight in US equities and gives us an attractive opportunity to add to US credit positions at good spread levels.”
“Our positioning in high yield is lower than it has been historically. We remain relatively constructive on the sector because fundamentals are supportive and default rates remain low, but we are finding more attractive opportunities elsewhere.”
The views echo F&C’S multi-manager team – Gary Potter and Rob Burdett – who recently told FE Trustnet that recent falls in markets had a provided a good entry point.
