The manager of the MFM Slater Growth, MFM Slater Income and MFM Slater Recovery funds – which are almost all fully invested and hold no cash – says the market will fall up to 10 per cent but will quickly bounce back.“There will be a correction soon. It is inevitable over the next six months or so,” said Slater (pictured).
“However, for the direction of travel to change you would need to see a lot more going on. As long as rates are very, very low and the economy is broadly improving equities are still the place to be compared with other potential homes for money.”
“A correction is long overdue irrespective of the level of the market because it hasn’t happened for a very long time and normally you get a five to 10 per cent correction every year or so. Therefore it is definitely overdue and I think we will get one.”
“It’s like the Tokyo earthquake: it is going to happen.”
Developed market indices have made huge gains since the financial crisis but unlike the S&P 500 and the MSCI Europe ex UK indices, the FTSE 100 index has yet to sell off significantly for almost three years.
Performance of indices over 6yrs
Source: FE Analytics
The last fall above 10 per cent was at the end of 2011 due to concerns over a potential break-up in the eurozone.
While he thinks this will soon change, he thinks that a more significant correction upwards of 20 per cent would only happen if an unforeseen event were to derail the UK economy.
As such a shock is likely to come out of nowhere, Slater says investors would be best off not trying to time the market and invest for the long-term.
“For the market to fall hard you have to a significant disruption to the economic recovery,” he said.
“Corrections don’t always relate to price or valuation. They normally do but if you look over the past five years, when valuations were very low, we were still getting corrections.”
“Our approach is not to finesse the macro as this is extremely difficult and I don’t know anybody who is consistently good at it. Our cash fluctuates a bit but the circumstances in which our cash rises materially would be if we are taking profits and can’t find homes for the money. We are not trying to guess the market level.”
Slater recently told FE Trustnet that he has been avoiding politically sensitive stocks in the face of the looming Scottish referendum on independence and the 2015 general election, expected in May.
However, he is holding very little in the way of cash.
The £116m MFM Slater Growth fund has fared well over the past six years. It has delivered top decile returns of 216.88 per cent over the period, despite below par performance in the down years of 2008 and 2011.
Slater’s focus on growth stocks, particularly in the FTSE 250 and FTSE Small Cap indices, means that he is susceptible to fall further than the market when it sells off.
However, he has a stronger record in up markets – particularly in rebound years such as 2009 – which has led to medium to long-term outperformance.
Performance of funds, sector and index over 6yrs
Source: FE Analytics
The Slater Recovery fund has also outperformed over the period, albeit by a smaller margin.
Rowan Dartington’s Guy Stephens thinks that it’s overly pessimistic to expect a correction of 10 per cent.
He says those hoping for a correction are playing with fire, and are better off concentrating on their long-term goals.
“Those supporting a correction are building by the day, possibly because they have already taken profits and are willing the market to weaken so they look shrewd,” he said.
“The more the consensus clamours for something to happen, the less likely it is that it will happen, as most supporters of that view will have positioned themselves accordingly, in this case, selling the equity market and building defensive positions.”
While markets have failed to break the psychological 7,000 mark until now, he believes that the index could see a shorter term break this year above its current 6,850 mark, which will then consolidate.
“The longer gravity is defied, the more likely new levels will be attained as the sellers will be exhausted and the buyers will win through.”
“This could then well develop upside momentum and a capitulation buying spree as we approach the fourth quarter and talk of a year-end rally begins.”
Star manager Richard Buxton told FE Trustnet earlier this year that a strong sterling was the only factor stopping the FTSE from breaking its all-time high.
Performance of £ versus $ over 1yr
Source: FE Analytics
The currency has weakened significantly versus the dollar since July.
