There is widespread bullishness about the prospects for markets this year, with a number of experts – the likes of FE Alpha Manager Giles Hargreave, Royal London Asset Management’s Martin Cholwill and Old Mutual’s Kevin Lilley giving bold predictions to FE Trustnet in recent days.
Even traditionally cautious investors such as Eclectica hedge fund manager Hugh Hendry and Nouriel Roubini – coined Dr Doom for his persistently gloomy predictions on the global economy – have thrown in the towel and turned bullish, leaving very few managers flying the flag of the bear.
Gray (pictured), manager of the Miton Special Situations fund, is one of the last of his kind to keep the faith, and warns that the global economy is still full of dangers.“This feels like a fairly dangerous game at the moment,” he said. “I’ve never fancied the Russian roulette approach to life. We feel the downside risks are far greater than the upside potential.”
“Humans have short memories. Everyone has forgotten the third quarter of 2011, let alone 2008.”
“I’d be quite happy if I was [the last bear]. Everybody has given up because central banks have been saying the right things and telling everybody that things are going to work out alright.”
“Every time [something goes wrong] central banks steady the ship.”
However, Gray thinks central banks’ moves have created a surreal investment environment, one that could erupt should even the most delicate of factors change.
He says the biggest reason equities have risen in value over the last 18 months is due to P/E multiple expansion, rather than underlying earnings growth.
“Over 40 per cent of US growth is driven from P/E multiple expansion and 100 per cent in Europe,” he said.
“I struggle to see much justification for P/Es going any further. At what point does the market get concerned about where it is getting driven to without earnings going through?”
In spite of improving economic indicators, Gray says the outlook for corporate earnings still doesn’t look good for 2014, a telling sign for the direction of markets.
The manager adds that the biggest threat to global markets is complacency.
“We’re five years into this zero interest-rate environment now,” he said. “People have got used to it. Most people are running their lives on very low interest rates. I’ve got a big mortgage, but it doesn’t cost me anything. It costs me less than my gas bill.”
Gray says that as the economy heals, interest rates will have to rise.
“These low rates were brought in to bail out the banking system, but the banking system is supposed to be better now. We shouldn’t have zero interest rates if things are OK.”
Should interest rates rise, Gray warns the worst-case scenario would be a rush for the exits, as happened in 2008.
He adds that there aren’t any places to turn to for safety or value.
“Two years ago it was risk-on or risk-off, but we’ve lost most asset classes since then,” he said.
“We’ve lost commodities and investment grade and sovereign bonds. Gold has been a disaster for most people. Emerging markets have been dire.”
“Equity markets in local currencies haven’t been that but in sterling terms they’ve lost you money. You’ve either got to be in equities or equities. Or some junk bonds.”
Gray admits there is a big difference in objectives for investors and says that for those who have a longer time horizon and are working on building up capital, it may be worth getting into the market because there are few places to turn.
However, he adds that for investors who have a pot of capital they want to protect, keeping a proportion of their money in a more cautious fund would be advisable.
The CF Miton Special Situations fund has underperformed the IMA Flexible Investment sector over the last one, three and five years – largely owing to its cautious approach.
However, over the last decade the fund has outperformed the sector, returning 134.79 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
More importantly, the fund has been remarkably consistent on an annual basis, delivering positive returns in every calendar year apart from 2012 when it was down 0.63 per cent. In the credit crunch of 2008, the Miton fund made 7.26 per cent while the sector shed 26.11 per cent of its value.
Again in 2011, the fund protected better than its peers, gaining 1.79 per cent compared with a loss of 8.73 per cent from the sector.
The fund is currently heavily invested in cash and cash-related assets, accounting for nearly a quarter of AUM. It has nearly 40 per cent invested in equities, with UK equities making up the largest portion at 17.9 per cent.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.86 per cent.
