Fish, who co-manages the investment trust alongside Eytan Shapiro, remains positive over the medium term but thinks the US economy will slow in 2014 and 2015 as the Fed’s tapering program gains momentum.
He says the S&P 500 has been rallying a long time by historical standards without a sizeable correction, and is therefore due one. However, he argues a pullback should be viewed as a positive for investors with a reasonable outlook.
“My outlook is ‘ugly positive’,” he said. “GDP and earnings trends are still good but we are not going to have another 2013 for a while and I wouldn’t be surprised to see a market correction sooner rather than later,” he said.
“It does not mean a pullback is imminent and it will not mark the end of the rally. It will most likely be a healthy occurrence since all of the underlying data continues to show a moderate economic expansion.”
The S&P 500 has been a stand-out performer compared to other major developed market indices. Over three years it has risen 44.85 per cent, compared to 24.98 per cent from the MSCI World index and 24.11 per cent from the FTSE 100.
Performance of indices over 3yrs
Source: FE Analytics
Fish says the Federal Reserve’s more hawkish attitude to tapering in last week’s FOMC meeting has made a correction more likely.
“When the Fed starts to tighten the market always expects it’s the end of the business cycle and so I’m expecting a market correction,” he said.
“You can never guess what will cause it; it could be equity investors pulling money out,” the manager added.
Tom Becket, chief investment officer at Psigma, agrees that a correction is imminent.
“It’s 40 days since we have seen a correction in the US equity market and we think that’s coming and may have started,” he said.
Fish’s JP Morgan American IT has outperformed its IT North American sector over three years but has failed to beat its benchmark, the S&P 500, over the same period. It has returned 41.02 per cent to investors compared to 24.35 per cent from the sector average and 45.48 per cent from the index.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
It is marginally ahead over one year, however.
In spite of near term risks, the manager remains fully invested, as his outlook over the medium to long-term remains positive. He favours financials and technology stocks, recently moving overweight US banks which he still thinks are on a recovery path since the financial crisis.
Among his biggest positions are Citigroup and Bank of America, which were amongst the hardest hit by falls immediately following the crash. Both lost circa 80 per cent of their stock market value in the months following the fall of Lehman Brothers.
Both have only recently started to rebound, buoyed by speculation they may soon meet capital requirements allowing them to pay dividends.
Bruce Stout, manager of the Murray International trust, thinks the market pull back will be much more serious than Fish anticipates, and is avoiding the US equity market as a result.
“The general contempt of equity markets to consider anaemic earnings growth and acknowledge cautious trading statements from global corporates suggests the harsh reality of doing business in the current challenging economic environment is not being factored into current equity prices,” he said.
“The risk of deflating expectations on highly rated equity valuations cannot be ignored; suggesting great caution should be maintained and exercised.”