Although the sell-off seems to have paused today - the FTSE 100 was up about 1 per cent in the first hour of trading today - investors such as former Miton manager James Sullivan warn there could be more turbulence ahead despite efforts by central bankers to ease the market volatility.Stock markets have gone into a tailspin since the start of September, when investor sentiment dropped on concerns over the end of quantitative easing in the US, slowing global growth, geo-political tension in the Middle East and the spread of the Ebola virus in west Africa.
FE Analytics shows the FTSE 100 has fallen 9.83 per cent since 4 September while Euro Stoxx 50 has lost 11.32 per cent, after investors fretted that the eurozone is on brink of another recession.
The developed market-focused MSCI World index has retreated 6.61 per cent, supported by a decline of around 4.5 per cent in US stocks.
Performance of indices since 4 Sep
Source: FE Analytics
Woodford said: “We’re in the teeth of a pretty severe sell-off but I think it’s important to differentiate between what we’re seeing now and what we saw in the wake of the collapse of Lehmans and the banking crisis in 2008. Then, there were major concerns.”
During the peak of the financial crisis, markets were worried about the health of the entire banking system and its ability to support the global economy.
This crisis of confidence led some to doubt the future of the capitalist model, but the manager of the CF Woodford Equity Income fund points out that conditions are much more benign this time around.
“This crisis today is not really about that at all. We are in a better place with the banking system - banks have more capital [and] they have plentiful liquidity,” he said.
“What we are facing … is a reappraisal of the outlook for the global economy. In the context of what I believe is happening to the global economy this readjustment in asset prices is arguably quite rational.”
The manager, who stepped down from the Invesco Perpetual Income and High Income funds earlier this year to launch his own asset management house, adds that the question of when the sell-off will end is “almost impossible to answer” - but seems confident it’s a matter of sooner rather than later.
“But my gut instinct is that we’re in the teeth of a pretty aggressive sell-off but it may well be substantially through the acute phase,” he said.
“I think there’s a bit more to go but I think we’ve endured a pretty severe sell-off already. I wouldn’t expect this correction to go on for weeks and months - I think it’s going to be over and done with relatively quickly.”
CF Woodford Equity Income launched in June this year and Woodford says the portfolio was constructed with a conservative view of global growth and the threat of deflation in mind.
He believes the fund is “very robustly positioned” for the growth outlook the market seems to be pricing in.
The fund is overweight in key defensive areas long favoured by the manager, such as healthcare and tobacco.
Although his exposure to micro-cap and unquoted companies has gained much attention, the manager remains a fan of more defensive, mega-cap stocks with AstraZeneca, British American Tobacco, Imperial Tobacco, GlaxoSmithKline and BT making up his top five.
Although it is very short time frame, the fund has held up well in recent sell-off.
Its fall of 6.82 per cent since 4 September is significantly below the declines seen in the rest of the IMA UK Equity Income sector and its FTSE All Share benchmark, as the below graph shows.
Performance of fund vs sector and index since 4 Sep
Source: FE Analytics
Woodford’s pedigree as a defensive manager can been seen through his much longer track record on the Invesco Perpetual Income fund.
He has made a number of contrarian calls which have helped him to dodge the worst of market crashes, such as avoiding tech stocks in the late 1990s and banks in the run-up to the financial crisis.
Invesco Perpetual Income lost 19.94 per cent in the crash year of 2008, when the All Share dropped 29.93 per cent and the average IMA UK Equity Income fund shed 28.54 per cent.
In 2011 it made a 8.59 per cent return, even though the benchmark was down 3.46 per cent and the sector average fell 2.90 per cent.
CF Woodford Equity Income has clean ongoing charges of 0.75 per cent.
James Sullivan (pictured), the fund manager who previously headed up CF Miton Special Situations with Martin Gray, told FE Trustnet that the recent sell-off fits in with the cautious view on markets he has held for a number of years.
“There wasn’t any one catalyst – it was an amalgamation of all the issues we’ve heard over the past three years. Central bank intervention has been enormous, but there’s a lack of growth and lack of inflation. The compound impact of these things is extremely negative,” he said.“I think a lot of people including myself felt it was a phantom market. The only driver was loose monetary policy and anticipative results of it. Now people are starting to wake up and realise that it’s not worked as well as many hoped for. Hopefully valuations will reach a level where they’re fair value.”
Almost exactly one year ago, Sullivan argued that the “perverse” rally in equities was not being matched by adequate corporate earnings growth and warned that the longer this is ignored by markets, the worse the eventual correction will be.
Speaking about today’s conditions, he told us: “It’s good that a bit of reality is now kicking in. It’s good for all concerned, because people are starting to realise equities aren’t a risk-free trade. A wake up call was needed.”
Angus Campbell, senior analyst at FxPro, says the outlook for markets is uncertain as signs of stabilisation have emerged following reassuring comments by central banks but the prospect for further falls remains high.
Comfort was taken after Federal Reserve official James Bullard said the central bank should consider delaying the end of its QE programme to reduce decreasing inflation expectations, while Bank of England chief economist Andrew Haldane now favours a delay in UK interest rate rises.
Campbell said: “Markets seem to have stabilised for now but it may be temporary as investors adjust for an environment of lower inflation, lower growth and higher interest rates, although it’s still far from a done deal that interest rates will indeed rise anytime soon.”
“The UK’s benchmark FTSE 100 is on course to record its longest running streak of weekly losses for over a year and on many indicators is signalling that it’s oversold so we could see a bounce especially since yesterday’s price action looks to have formed a long legged ‘doji’ candlestick which is considered to be a buy signal.”
“This does not mean the sell-off is over of course and the 10 per cent correction from the highs we’ve seen to date could be extended before better buying levels are presented.”
