The FTSE 100 has rallied over the past week, setting a new record high after smashing through the psychological barrier of 7,000 points. It was only in recent weeks that the blue-chip index reached levels last seen on the eve of the financial crisis in 2008 and the latter days of the 2000 dot com bubble.
According to FE Analytics, the FTSE All Share is also up 135.81 per cent over the past six years, in total return terms, while the S&P 500 has gained 181.36 per cent.
Performance of indices over 6yrs
Source: FE Analytics
Mundy (pictured), who heads the £2.5bn Investec Cautious Managed fund, says investors should be concerned that there will be unintended consequences of the quantitative easing (QE) programmes of the world’s central banks, which could prompt a prolonged period of down markets in stocks.
“This is what happens when investors move away from expensive equities and/or lose confidence in central bankers. It is a simple as that really,” he said.
“The market's loss of faith in central bankers is a particularly huge risk to markets. At the moment equity investors believe central bankers have got their back, but they don't. There have been two bear markets in the last 20 years and both times equity investors thought central bankers had their back and both times the market fell very significantly.”
In fact, the manager says the main issue forming his current strategy for the portfolio is that central banks are behaving in a way that they have not done before and are overconfident in their beliefs that they can get markets “back to an even keel”.
“We have seen the positive consequences of QE – bond yields going low and equities going high – but we have not seen any negative consequences yet. We think markets being priced at high valuations while we are undergoing a financial experiment is, to us, an odd combination of circumstances. “
“Could a 2008-style crash happen? Yes, history tells you that after big bull markets they tend give up a lot. There is no rule about how long a bull market can last, but it comes back to valuations.”
While Mundy has UK equity exposure in both his Investec Cautious Managed fund and Investec UK Special Situations fund, he currently opts for the minimum sector requirements in both cases and prefers alternative plays due to the “high expense” of UK stocks, particularly in the mid-cap space.
“History says you should not be having a big view on equities while they are expensive because even if you are not very close to it time-wise, you tend to give quite a large part of it back anyway,” he said.
“We have been de-emphasising our mid-cap weighting and increasing our FTSE 100 weighting. It is our most contrarian idea. In general our peers have a lot more mid-caps than us. We think it is an over-analysed part of the market where valuations are now far less forgiving than they were a few years ago.”
“However, nobody can really say whether we are at the end of a bull market just yet.”
Instead, he is playing a short position in US equities, holds Norwegian kroner bonds and index-linked gilts, as well as gold and silver mining shares, to try and combat potential volatility. He adds: “This has been pretty stable type of approach for the last five years.”
Both gold and silver mining stocks have been falling for around four years and have subsequently been fairly out of favour with the broader market, but they have made some headway in 2015.
“We have bought the gold miners partly because they look so cheap relative to their history and to their assets, and partly because it is play on gold which we think in a world of money printing stands as an alternative currency,” Mundy said.
The Federal Reserve’s recent communication to the broader market appeared to offer reassurances that the central bank will not move aggressively to hike interest rates from their historic lows but Mundy believes this has wholly been misinterpreted.
“It was interesting with the Fed saying last week that economic growth had not been as strong as they were expecting and then all of a sudden interest rates got pushed back a little bit and equity markets go up. However the Fed was affectively saying that this economy hasn’t got a huge amount of momentum behind it,” Mundy said.
“Despite seven years of quantitative easing, we don’t seem to have gone very far in making the world a higher growth place. We are still in a money printing scenario.”