Gray: Market rally based on nothing
The FTSE has risen by more than 10 per cent in the last 10 weeks or so, but some experts believe this is based on false expectations.
By Joshua Ausden, News Editor, FE Trustnet
Tuesday August 14, 2012
The recent surge in equity markets is based on false expectations, according to star manager Martin Gray
, who says nothing has happened to alter his increasingly cautious stance.
The FE Alpha Manager, who heads up the sector-leading CF Miton Special Situations Portfolio
, believes the FTSE’s 11.61 per cent rise since 1 June is unsustainable and anticipates a market correction in the near future.
"Mario Draghi [president of the European Central Bank] made some throwaway comment and then went on holiday – that’s been the main basis for the rally," he said. "Things have quietened down, sure, but that doesn’t mean anything has improved."
"The £1bn of liquidity being pumped into the system every day [through quantitative easing] has also helped, but again this hasn’t done anything to solve the problems."
Improving US jobs data and Draghi’s vow to "do whatever it takes to save the euro" have been met with a great deal of optimism from the markets. However, Gray believes most of the rest of the news has been negative – not positive.
"We haven’t really had any news that we didn’t expect and if anything some figures have disappointed," he said.
"Unemployment still isn’t great, GDP growth is awful and while corporate results overall have been OK, earnings and revenue surprised on the downside."
readers appear to share Gray’s pessimism: according to our latest poll, almost half believe it will be at least six months before the FTSE breaks through the 6,000 barrier.
Unless the FTSE – which at the time of writing is at 5,852 – stays flat until after Christmas, this implies a significant market correction in the near future.
Only 9 per cent expect the surge to maintain momentum and break 6,000 within a month, while 20 per cent believe it will happen within three months, and 25 per cent within six.
The index is up 11.61 per cent since the beginning of June, compared with 11.46 per cent from the Dax and 7.6 per cent from the S&P 500.
Performance of indices over 1-yr
Source: FE Analytics
Invesco Perpetual’s John Greenwood agrees that the market has overreacted to recent news regarding the eurozone and thinks things will have to get worse again before they get better.
"In my view, Mr Draghi overplayed his hand," said the chief economist. "In London on 26 July he had promised to do 'whatever it takes' to save the euro, but apparently he did not mean that he would deliver on 2 August. There was no rate cut, no SMP [securities markets programme] re-activation and no introduction of a new LTRO."
"Draghi made clear that before the ECB would be willing to buy Spanish or Italian bonds, the country in question must formally request EFSF [European Financial Stability Facility] support."
"In other words, the ECB will not step into the bond markets until things have worsened to the point where the country has appealed for a Greek-style rescue. Investors looking at Spanish or Italian sovereign bonds will remember the Greek debt haircut."
"In short, the new programme will only be activated after Spain or Italy fall deeper into crisis."
Performance of fund vs sector over 10-yrs
Source: FE Analytics
£835m CF Miton Special Situations Portfolio
is a top decile performer in its IMA Flexible Investment sector over five and 10 years, with returns of 36.44 and 179.25 per cent respectively.
The fund recently moved from the IMA Mixed Investment 40-85% Shares sector as it had too little invested in the equity market.
According to FE Analytics
, Gray’s portfolio currently has 35.4 per cent in equities – around the same amount it has in cash.
Gray performed particularly well during the dotcom and Lehman crashes, protecting extremely effectively against the downside.
However, he hasn’t always been a defensive manager and outperformed the market during the up years of 2003, 2004 and 2005.
The CF Miton Special Situations Portfolio has a minimum investment of £1,000, and a total expense ratio (TER) of 1.73 per cent.
It is a fund of funds, holding the likes of Schroder Asian Bond and GLG Japan Core Alpha
in its top-10.