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Big risks, alarmism and the FTSE at 7,400: FE Trustnet’s best stories of the week

29 August 2014

The FE Trustnet team sum up their favourite articles of the past week, where discussion has turned to whether risks can derail high markets.

By Gary Jackson,

News Editor, FE Trustnet

The past week has seen plenty of talk about markets touching record highs and how long we can enjoy this before something comes along to send asset prices tumbling south again.

We’ve seen the S&P 500 break the 2000 mark and commentators in the UK tip the FTSE for similar record-shattering gains in the final months of 2014.

But at the same time, we have a fresh escalation in the Ukraine crisis and managers call for a move back to defensive positioning.

Here are five of our best stories from this week. We hope you all have a great weekend.


Major risks cause funds to hike cash: Should you be worried?


Recent months have seen a few managers hike their cash levels on the back of fears that a sell-off in equity markets is long overdue, after a few months of low volatility and rising risks.

Three of the biggest risks facing the market are rising interest rates, worries over the health of the European economy and geo-political tension such as the conflicts in Ukraine and Iraq.

However, not all investors are convinced these are reasons to sell up and head to the hills.

Psigma chief investment officer Tom Becket said investors need not make any wholesale changes in their portfolios over the above risks.

“It’s quite difficult to call how markets will perform over the next few months, but I’m not massively bullish and I’m not massively bearish, I’m just quite bored of it to be honest,” he told FE Trustnet.


"This may sound alarmist but..." – Threadneedle global equity chief calls time to go defensive

But one investor who is convinced that now is the time to consider making portfolio changes is William Davies, Threadneedle’s head of global equities and manager of the £887.7m Threadneedle Global Select fund.

Davies said the rise of nationalism in several parts of the world, including Russia, India and Japan, has him to doubt his previous “optimistic” predictions and makes it more likely that we face a low-growth environment, which could impact asset prices.

The CIO highlighted the tension around Ukraine as a particular worry, saying the potential for more sanctions between the West and Russia means equities should command a higher risk premium than they do at the moment.

“This may sound alarmist, but I think it’s time to take a more defensive equity position,” he said.

“We are faced with a world where conflict is becoming more commonplace, nationalism is rising, borders are closing, trade is becoming disrupted and economic activity is under increasing pressure.”


Brewin Dolphin: Why FTSE 100 can still hit 7,400 this year

But then Guy Foster, head of research at Brewin Dolphin, presented a strongly bullish case why the FTSE 100 will not only break its psychologically important 7000 barrier but could go as high as 7400 by the end of 2014.

Foster argues that the prospect for continued growth in equity markets outweighs headwinds such as a strong pound, an unusually cold US winter and amplified geo-political tensions over the Ukraine/Russia stand-off.

“The FTSE does not look very inspiring to the chartist. Just about scraping out higher-lows but not having made a higher high since May. Understanding that we will need some fireworks in the final third of the year, the question is should we reduce our forecast?” he said.

“We’re not going to. The chances of hitting the target have dropped, but not materially. There are a number of mitigating features of the UK which partially explain how lacklustre it has been.”

Foster says the lack of perceived value anywhere but equities is the primary reason to expect the FTSE to continue to rise, as says the second half of 2014 is likely to be much more positive for UK stocks than the first half.


How would these groups cope if they lost their star manager?


Moving away from the fortunes of the markets and onto those of asset management houses. Alex Paget looked at which industry members looked most vulnerable to key man risk.

Whitechurch’s Ben Willis highlighted Alastair Mundy and Investec, Nigel Thomas and AXA IM, Carl Stick and Rathbones, and Angus Tulloch and First State as examples where a single manager’s departure would be a massive blow for the group.

Investec were unable to comment, but AXA IM revealed that, even though Thomas has no imminent plans to retire, his hugely successful AXA Framlington UK Select Opportunities fund would be taken over by Chris St John when the star manager departs.

Rathbones stressed the team-orientated approach of the business while pointing out that Stick is a “highly regarded and valued fund manager”.

First State also said it success is built around a strong team but said succession planning is “always important”.


Does Tesco’s sell-off signal a buying opportunity?


The week ended with UK supermarket giant Tesco shocking the market with a profit warning and a dividend cut of 75 per cent, leading to a tumble in its share price.

Tesco has dropped more than 20 per cent this year, leading investors such as the contrarian manager Alastair Mundy to buy it for his Investec Special Situations fund earlier in the year.

Not all are convinced this is a buying opportunity, however.

Value manager George Godber, who runs the Miton UK Value Opportunities fund alongside Georgina Hamilton, said Tesco’s share price has not fallen far enough for him even though he wants to buy into supermarkets at some point.

And Ardevora partner Jeremy Lang, manager of the firm’s UK Income and Global Equity funds, says supermarket majors such as Tesco have the wrong business model as they try to be a jack of all trades but end up being master of none.

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