While the summer months were categorised by record low implied volatility, the UK equity market has trended downward since early September.
Losses have been compounded over the last week as the FTSE has continued to fall on the back of concerns over Europe, geo-political risks, the Ebola outbreak and worries over a world without QE.
Performance of index since Sep 2014
Source: FE Analytics
At the time of writing, the FTSE stands at 6,211 – having been at 6,800 at the start of September. The index shed 2.83 per cent yesterday alone.
Some experts says these falls should be viewed as a “blood-letting” correction which has left the equity market attractively valued, but Wouter Volchart, manager of the Henderson Global Trust, is not convinced.
He currently has no gearing in his trust and he won’t be borrowing any time soon as he thinks the market will continue to be weak for some time and he doesn’t want to be hit with further losses.
“In these sorts of situations, I constantly think about what I would do and I do not think it is a time to go to a bank, take on a loan and put it into the stock market,” Volchart said.
“Equities probably are the best asset class available to investors. Compared to their history, they aren’t massively expensive but I do think they are stretched and that is because valuations are based on earnings that are at peak margins.”
“On top of that, we have just had a record bull run so I think we need to see some steam being let out; that’s what I would like to see.”
He added: “However, I’m not talking about what we have seen over the last week, it needs to be more significant than that.”
Volchart has managed the Henderson Global Trust since February 2014 and, according to FE Analytics, it has returned 1.9 per cent over that time.
This is less than its MSCI AC World benchmark, but more than the IT Global sector average.
Performance of trust vs sector and index since Feb 2014
Source: FE Analytics
Paul Niven, the new manager of the Foreign & Colonial Investment Trust, agrees with Volchart.
His portfolio, which is the oldest investment trust in the world, is leveraged at the moment but he is going to reduce gearing.
“The [gearing] range on the trust over recent years has been between 5 per cent and 19 per cent; but it’s about 7 per cent now,” Niven explained.
“We do have facilities in place so that we don’t have to go out and renegotiate a new debt facility to replace our £110m debenture, which rolls of at the end of the year, but my current intention is that we will not be borrowing long term.”
“Obviously, long-term rates look quite attractive, but personally I am not willing to take a strategic and long-term decision to increase or add new gearing to the trust because of concerns about equity market valuations, so I’m going to let it drift down towards the lower range.”
Geir Lode manages the £160m Hermes Global Equity fund and therefore doesn’t have the ability to gear-up his portfolio.
However, he too is concerned that volatility is going to persist for the coming few months and, because of that, doesn’t expect equities to bounce back anytime soon as there are still too many headwinds.
“If you look at it in terms of valuations, the market doesn’t look that bad,” Lode said.
“If you were to make a pure valuation case then that would be good. But then, I think a lot of people look at increasing risks out there as we have been through a period of very low market volatility but now suddenly we have all the problems in the Middle East, Hong Kong and with Ebola.”
“I think we will see more market volatility going forward because there are more macroeconomic events on the horizon.”
While he says that investors are paying more attention to global geo-political risks, the major problem facing them over the short term is that equity markets will soon have to cope on their own as the Fed is expected to end its quantitative easing programme at the end of the month.
Performance of indices over 3yrs
Source: FE Analytics
He says that as the added liquidity from this programme has been so instrumental in the equity bull run, it is only normal to expect a period of weakness as investors are weaned off the stimulus.
“They were printing money like crazy and at some point you have to stop. The problem is, they have been printing money but you haven’t got any growth,” he said.
“If you have to stop printing money and you haven’t got any growth, what happens? You get negative growth.”
There are those who think that the selling and negative sentiment has been overdone, however.
Tom Becket, chief investment officer at Psigma, is one such individual. Becket agrees that the recent correction is more “destructive” than others investors have witnessed over recent years as there are more technical drivers at work, such as a slowing growth in the eurozone and concerns that the ECB won’t be able to generate growth and inflation.
He also points out that the Ebola crisis and a falling oil price are both worries. However, although Becket had voiced his concerns about valuations earlier in the year, he now thinks the worst of the selling is over.
“There were plenty of reasons for investors to take a cautious view in the last few weeks, but ultimately we believe that some of the concerns are overdone and the recent correction that we have suffered allows long-term investors the opportunity to selectively add to quality investments at fair prices,” Becket (pictured) said.
“Much of the over-valuation and complacency that had concerned us across global asset markets has been washed out in the last few weeks.“
“Whilst we remain highly vigilant and are working harder than ever to evaluate the risks, we are also focussing on what to buy amongst the indiscriminate selling that has taken place.”
Dominic Rossi, global chief investment officer at Fidelity, is also more bullish in his outlook.
“In terms of the longer-term market cycle, we remain in a bull market which I think has another couple of years to run. The economy and market is mid-cycle and a mid-cycle correction would offer an opportunity for investors to get into the market at reduced valuations.”
