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Market rally a flash in the pan, says Gray

31 October 2011

The FE Alpha Manager says he will only add to his meagre position in equities if valuations return to the same level as after the 2008 crash.

By Joshua Ausden,

Reporter, FE Trustnet

ALT_TAGThe recent spike in world markets is based on nothing more than exaggerated news headlines, according to Martin Gray, manager of the CF Miton Special Situations Portfolio, who says equities are even less attractive now than they were before the European bail-out deal.

Gray, who holds more in cash than equities at present, advises investors not to get carried away with the way markets have reacted to the "resolution" forged on 26 October last week.

"To be honest with you, I’ve been scratching my head wondering why markets have gone up," said Gray, who also heads up the CF Miton Strategic Portfolio.

"As far as I can tell, nothing has happened that should make us feel any more positive about the situation. No-one has put their hands in their pockets and bailed anyone out – debt has simply been passed on to another body."

"A lot has been said about the US GDP figures, but they were pretty much bang on in line with what we expected. All we have now is a slightly more expensive equity market, so I won’t be upping my exposure at these levels."

Performance of indices over 1-yr 

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Source: FE Analytics

The manager acknowledges that a positive reaction to the bail-out was predictable, since news flow has been so negative of late, but believes the end of last week’s surge was based on false pretences.

However, he expects the surge to be relatively short-lived, and envisages further turmoil in the eurozone in the coming months.

"European and UK GDP figures will be coming out soon, and I wouldn’t expect them to be particularly promising," he said. "So in the short-term I’d expect to see markets come off pretty quickly."

"The biggest reason to be wary, however, is the fact that Greece is still a part of the eurozone. The differences in lifestyle and culture between Greece and the other countries make the situation completely unworkable. From a practical viewpoint, I just can’t understand why they’re still included."

Gray says that fundamentals are so poor at present that only another 2008-style crash would lead him to substantially increase his weighting to equities.

"We’d have to have more days like the beginning of August this year, or another crisis for the portfolio to change its outlook," he said. "I believe there will certainly be opportunities in the equity market in the next few years, but not at these levels. I think we’ll see prices go down a lot lower than they are now."

It appears the majority of FE Trustnet users agree with Gray. In our latest poll, 78 per cent of respondents said they thought markets have reacted too positively to the eurozone debt deal.

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Source: Trustnet.com

However Johanna Kyrklund, head of multi-asset investments at Schroders, is more optimistic. Although she remains vigilant to the risks within the eurozone, the team has increased the equity exposure in the range, which includes the Schroder MM Cautious Portfolio.

She commented: "On the face of it, [last week’s] measures could help to calm markets as we go into the year-end."

"However, the devil will be in the detail: in order to leverage the EFSF at a reasonable cost, France must retain its AAA rating; there is still a lack of clarity as to what the role of the ECB will be; and it remains to be seen if a 50 per cent haircut will be enough to save Greece from bankruptcy."

"Overall, we have increased our exposure to equities and credit over October in the expectation of improved market performance into year-end."

"Within equities, our emphasis is on higher quality exposures and, across other asset classes, we aim to focus on enhancing yield in a low interest rate environment."

Performance of fund vs sector over 10-yrs

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Source: FE Analytics

According to FE Analytics data, Gray's CF Miton Special Situations Portfolio is among the top-five performing funds in its sector over five- and 10-year periods. It’s also one of the few Balanced Managed funds that has broken even so far in 2011, and has the lowest FE Risk Score in its sector.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.